Shaving the Close

VentanaView™

Summary

The need to shorten accounting closing cycles is of growing importance to companies. The Securities and Exchange Commission (SEC) enacted rules last year that will shorten deadlines for quarterly and annual financial reports for companies whose shares are traded in the United States. Ventana Research also asserts that shorter closing cycles are consistent with more mature financial control systems — a key objective of Sarbanes-Oxley section 404. While closing cycles lengthened last year, and may increase this year, we expect the uptrend will reverse by at least 2005 as companies adapt to a more stringent accounting environment by implementing solutions that automate more parts of the financial close process to meet regulatory requirements.

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Company closing cycles lengthened in 2003, reversing a longstanding trend toward faster closes that has been underway since electronic spreadsheets and integrated ERP systems were introduced. While there may have been a variety of factors at work, greater scrutiny of financial information (related to either Sarbanes-Oxley or the penalties for having to restate numbers) probably has caused companies to be more cautious about avoiding mistakes.

Ventana Research thinks companies must focus on shortening the interval and the number of hours devoted to periodic closing activities. Public companies required to file with the SEC are facing shorter filing deadlines and therefore must maintain or expand the time they have to prepare public documents and digest results for discussion with the board and investors. For both private and public companies, we conclude that the amount of time needed to complete the close is an indication of how well managed the financial processes are, and how well designed the information systems are.

Shortening the closing cycle involves at least three sets of issues: process design, process execution, and IT resources. CFOs and controllers must evaluate:

Reducing the number of days it takes to close the books involves identifying the activities and process steps that drive longer closes and determining how to eliminate them. Often, creating improvements involves an iterative process that focuses on finding solutions to process issues (which may or may not involve a technology element), and identifying technologies that can play a role in process improvement. We have found that corporations often have the technologies needed but have not used them. In some cases this was because of inertia (“if it ain’t broke...”); in others it was because the finance organization did not know they existed or how they could use them.

For most companies, eliminating as many manual steps as possible will be the most productive approach to shortening the closing cycle. This can be accomplished either through direct automation or indirectly through a change in accounting systems.

With respect to direct automation, two of the more common areas where information technology can play an important role are in automating manual reconciliations and in performing consolidation and reporting functions. Spreadsheets used in the consolidation process must be reduced or eliminated. Any company that re-enters data during the closing process must find a way to automatically pass data from one system to the next. In addition to speeding the closing cycle, these steps will enhance the maturity of the financial control systems because the use of standalone spreadsheets (such as Excel) and manual re-entry of data create fraud risks that must be controlled, tested, and audited.

Simplifying a company’s financial IT systems is another important area to consider. A company’s financial software environment evolves over time; it is almost never planned. Moving to a single instance of a single ERP package is rarely practical for a Global 2000 company. But companies usually can reduce the number of accounting packages they are using and the number of instances of each. In the past, these steps were ‘optional at additional cost.’ Today, under the current regulatory environment, they will almost surely pay off.

Assessment

Finance organizations of public companies will have to focus on shortening their closing cycles in order to be able to meet mandated shorter filing deadlines. The pressure is also on public companies to improve the maturity of their financial control environments. Ventana Research believes that will happen in both public and private companies because shorter closes and more mature control structures are consistent with reducing administrative expenses, particularly the finance group. Although there may be some improvements that companies can make solely by improving process design and focusing on better execution, the finance executives will find that real performance leverage comes from employing technology more intelligently.