How IT Executives Can Help Speed Up Financial Reporting

When it comes to closing the books, the benefits of speed are undeniable. And CIOs are uniquely positioned to help their organizations reap them.

As long as they’re meeting their regulatory reporting deadlines, most enterprises don’t think a lot about closing their books more quickly.

Maybe they should start.

Increasingly, the speed with which an organization closes its books and reports its financial results is being looked at by practitioners, analysts and investors as a defining metric for evaluating whether the organization possesses the best possible processes and enabling technologies. And it turns out that many companies don’t, even those making huge IT investments and supporting equally large IT departments.

World-class companies can close their books internally in five days, while top performers can do it in three, says Scott Holland, IT practice leader at the Hackett Group, a strategic advisory firm. But only about 10 percent of U.S. enterprises are in that class, Holland says.

Ask a typical CIO how his company could improve its financial reporting and his recommendations most likely will focus on mechanics: normalizing data, collecting it and passing it on to some central repository. Some CIOs will go a little further to suggest that the data generation and gathering systems be reviewed for compliance requirements. And that’s fine as far as it goes—except it doesn’t go very far. It doesn’t address what most CFOs need; it doesn’t help the business run more intelligently; it doesn’t cement IT-business alignment. No matter how integrated a company’s financial streams are, CFOs will still struggle to close the books and issue the appropriate reports. Their staffs will still spend countless hours reconciling data gathered from multiple departments and systems—all under deadlines that are shrinking even as regulators ask for more information.

At the very least, what the business needs from IT is a way to make the financial close and reporting process more efficient and accurate in order to lower costs and minimize the risk of providing incorrect information to stockholders and regulators.

But that’s merely a tactical improvement. The real opportunities lie elsewhere. By redesigning the organization’s financial processes and then implementing the technology infrastructure to execute them, business managers and executives can gain a near–real-time view of financial performance, enabling them to identify problems and opportunities much earlier. A second opportunity is to understand the relationships of all financial information so managers and executives can do analysis outside the box. Lastly, by providing accurate filings more quickly than your competitors, your company will increase investor confidence, and that will put a smile on the face of every business executive and make the CIO king for (at least) a day. (For how a faster close can lead to better business-IT alignment, see “Speeding Alignment” in Related Stories)

NEEDED: THE BIG PICTURE

Noel Gorvett is well aware of how an organization can miss the opportunities offered by speeding the close.

In 2002, Gorvett, the group business systems manager at book publisher Pearson, began exploring centralizing group reporting. The idea was to replace the more than 400 general ledgers and 80 ERP systems in use throughout the global publisher’s operating units in 60 countries to track $7 billion in annual revenue. The IT group’s goal was more efficient maintenance through a common technology base. But the focus on platform integration overlooked a key business need: a way to report the financial information flowing through the systems in a meaningful, consistent way at the departmental and executive levels.

“Each Pearson department was working off its own assumptions,” Gorvett recalls, such as the criteria for sales forecasts and profit margins. That made it difficult to create a consolidated financial report, much less to identify variations from plan so managers could act quickly while there was still time to do so usefully. It became clear to Pearson’s group CFO in summer 2003 that a different approach was needed, one that focused on fixing inefficiencies in the financial reporting process itself and standardizing processes across Pearson. That way, executives could work from the same financial assumptions, no matter what applications they used to manage their books. This in turn would enable them to quickly identify significant differences across divisions and adjust strategies if needed. And the processes would gather the information that would be needed for compliance, regulatory and stockholder filings—no more scrambling to retrieve this information at each close from buried Excel spreadsheets or by running queries against transaction systems.

So Gorvett—working as a liaison between the CFO and the CIO—led Pearson on a tack that determined standard financial transaction, auditing and reporting processes for the whole company—creating, for the first time, a standard chart of accounts. This provided a unified list of all accounting data tracked to ensure that everyone used the same definitions and categories and that the enterprise captured all the financial information it needed at all locations.

The next step was to set up the technical requirements for what data needed to be captured from what sources, how it would be presented to the central financial reporting tool and what processes had to be followed to generate the results. That way, no matter what technology platform a division happened to use, the data that management was receiving would be consistent, accurate and timely.

The result: Pearson was able to close its quarterly books in six days (down from about 20) and reduce its year-end reporting time from eight weeks to six weeks. And because everyone was working from the same chart of accounts, financial staffers no longer had to burn the midnight oil to translate their financial information into what the executive team needed.

THE ROI OF SPEED The Hackett Group’s studies show that “world-class companies spend 45 percent less” on their closing and reporting efforts than other companies, which on average saves $5.5 million per $1 billion in revenue. These savings come, in part, from needing fewer people and systems to scrub data.

There’s a compliance payoff as well: Consistent, self-auditing processes help companies more easily conform to regulatory mandates such as Sarbanes-Oxley by reducing the risk of errors, says Peter Harries, a partner at accounting consultancy PricewaterhouseCoopers.

A faster close also helps large, public companies—typically those whose stock is worth more than $700 million—meet new and more stringent regulatory reporting deadlines from the Securities and Exchange Commission. As of Dec. 15, 2006, such “large accelerated filers” had to complete their annual 10-K reports within 60 days of the fiscal year end, down from 75. (The schedule for quarterly 10-Q reports was maintained at 40 days.) A 2006 Hyperion survey of SEC filings (covering 2003 to 2005) shows that the average Fortune 500 company takes 67 days to file its annual reports, with 76 percent taking more than 60 days. These statistics show how close to the edge many companies live. Reducing the time it takes to close helps free up time for reporting, says Joe Kuehn, an advisory partner at accountancy KPMG.

Finally, a fast close builds investor confidence. Investors are right to make the inference, Kuehn says, that if the close is slow it means processes are broken. And if the processes are broken, he says, chances are the data is broken.

There’s another hard-to-quantify but critical payoff: smarter business management.

“World-class organizations go from transaction mode to analysis mode,” says Hackett Group’s Holland, using financial data for analysis that highlights problems, identifies opportunities and considers potential shifts in customer behavior, marketing effectiveness and product requirements.

“A close is a step in time, and it’s only meaningful if it’s close enough to the present,” says Terry Flood, COO and president of Logicalis Group, an IT consultancy.

“As business expands, it becomes imperative to have credible snapshots of performance. The close is the lens,” says Logicalis CFO Greg Baker.

So Logicalis has established both common processes and a common technology platform. The result: a four-day close. “All our managers are tied into the metrics of our company. If we waited a month, we’d miss those key measurements,” Baker says.

“When IT marries up with the CFO or CEO, we see tremendous success,” says Holland. A CURE FOR MANDATE MADNESS

For many companies, meeting complex requirements, such as evaluating the effectiveness of newly required accuracy controls, in the same amount of time—or even in less time than before—forces executives to rethink their closing and reporting processes. That was the case at Rock-Tenn, a $2.1 billion manufacturer of paperboard products such as packaging and retail displays.

“The close had been a perfunctory process—no one really looked at it. Then Sarbox came along,” recalls CIO Larry Shutzberg. Sarbanes-Oxley exposed all the touchpoints in the process where errors could creep in.

“We have 90-plus locations, with people doing accounting functions in the field. Getting everybody to do what they need to do is like herding cats,” Shutzberg notes. Add to that challenge a string of acquisitions and management’s attention was diverted from the increasingly patchwork financial processes that were taking root.

So Shutzberg, working with his CFO, led an effort to identify and standardize Rock-Tenn’s financial controls.

“It was a painful process,” he says, overcoming people’s resistance to let go of systems they had used for years. Shutzberg uses software from Movaris to determine what Sarbanes-Oxley would require of the revamped processes, and then to test the new processes against the requirements.

“The first thing you need to do is understand your current state,” advises PricewaterhouseCoopers’ Harries.

Shutzberg’s first step was to create standard Excel checklists for all Rock-Tenn financial and accounting staff. But truly adhering to Sarbanes-Oxley’s requirements “was impossible to do with spreadsheets, e-mail and PowerPoints,” he notes, because it’s extremely difficult to validate the accuracy and consistency of such disparate, individually maintained data. So Rock-Tenn launched a project to replace its aging ERP system with one that supports Sarbanes-Oxley processes out of the box. When it’s deployed later this year, “we’ll see if it’s good enough,” Shutzberg says. THE BOTTOM LINE PAYOFF

The process efforts at Rock-Tenn have reduced its closing time from 15 days to 10. But “the business didn’t feel disadvantaged when we were closing in 15,” Shutzberg says. The real benefit for Rock-Tenn (in addition to meeting Sarbanes-Oxley requirements), he says, was “in consolidating accounting by reducing headcount.”

An efficient financial process typically lowers costs by eliminating the need for reconciliation across systems and processes, thus reducing demands on staff, and by eliminating duplication of effort across organizations. Common processes and systems allow for more automation and shift responsibility to a smaller set of managers.

At Accenture, sales, general and administrative expenses have dropped 1 percent a year as a share of revenue, says Tony Coughlan, controller and chief accounting officer—that’s a $166 million drop for Accenture in 2006, given its $16.6 billion in revenue. In essence, Accenture’s sales, general and administrative expenses have stayed flat as the business has grown, he notes. Coughlan attributes this payoff, in part, to reworked financial processes and a consolidated technology platform: “We’ve cut finance headcount even as we grew, and a significant driver was our ability to leverage the infrastructure better.” IT costs relative to corporate revenue have also dropped by half, says Accenture CIO Frank Modruson. “And we have better technology than we did before,” he notes. (Editor's note: This paragraph reflects a correction. Go here for an explanation.)

MANAGING SMARTER Accenture wasn’t just looking for cost reductions. When it converted from a private partnership to a publicly held company in 2001, “we were publishing our reports 40 days after closing, and the deadline then was 45 days,” recalls Coughlan. “That didn’t look as good as we wanted.”

A big reason reporting took so long was that Accenture’s decentralized organization—designed for a partnership—didn’t support the visibility that investors and regulators demanded and that senior executives could use to be more nimble. “You end up with different versions of the truth. With different systems, you get timing differences that make it hard to cross-check your financial data,” says Modruson. That slowed both the close and reporting processes and risked incomplete, conflicting information that could hobble the company.

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