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.

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Coughlan, Modruson and management reporting chief David Rowland tackled the problem on two fronts over a three-year effort that ended in September 2004. (“We had to join at the hip,” recalls Modruson.) The first front was to rework a series of sequential processes into a single one, thereby reducing touchpoints. The second was to consolidate various financial systems into a single instance of SAP’s ERP system, converting 450 systems into one ERP implementation. In addition to reducing expenses, these efforts lowered the reporting time from 40 to 22 days, letting Accenture’s financial staff go on vacation for Christmas 2006—a first, Coughlan notes. United Technologies Corp. (UTC), a $48 billion diversified manufacturer, also gained a quality-of-life ROI from its financial integration efforts, notes CIO John Doucette. “People no longer work until 2 a.m. to meet reporting deadlines,” Doucette says. “They go home on time.”

But the critical business advantage UTC reaped from its faster close is actionable insight. “It’s about getting information quickly, to be able to act on it,” says Greg Hayes, UTC’s VP for accounting and finance. For example, in fall 2006, he noted a drop-off in air conditioning orders just as external data showed a decline in new-home construction across the United States. Armed with current sales shifts, UTC adjusted its orders so it wouldn’t get stuck with inventory, and it adjusted factory schedules so it wouldn’t produce as many air conditioners. “Knowing only the general trend wouldn’t have shown us the specific implications for our business,” says Hayes.

To achieve that degree of agility, UTC consolidated 250 instances of Hyperion financial reporting tools into one instance of Hyperion Financial Management (HFM) across its six subsidiaries, such as helicopter maker Sikorsky, aircraft engine maker Pratt & Whitney and air conditioning maker Carrier. By having a common reporting and analysis tool into which all subsidiaries feed consistent financial data, the company has achieved a five-day close, down from eight.

“If we had a single ERP system, I think we could close the books in one day,” Hayes says. But he doesn’t think it makes sense to impose the cost of conversion to a single ERP platform on six distinct subsidiaries given how fast the organization closes already.

As Pearson’s and UTC’s experiences show, a unified technology base can make an efficient process execute faster, but Hackett Group’s Holland advises that CIOs first identify the right business processes for the ERP or other systems to execute.

In fact, that’s Pearson’s strategy, says Gorvett. With a consistent financial process in place that delivers what’s needed, the company is now able to focus on consolidating its ERP platforms. And while UTC doesn’t expect to see a single instance of ERP across all six subsidiaries, it is moving to consolidate each unit on just one ERP system. WHY REPORTING IS DIFFERENT Even organizations that have fast closes find it hard to reduce the time it takes to report results to investors and regulators. UTC takes only five days to close its books each quarter, but it takes another 17 days to prepare the 10-Q quarterly filings for the SEC. And the annual 10-K takes a few days more.

The review process relies largely on human effort. Lots of people—executives, legal staff, board members—have to go through the financial data and projections, as well as the legal, labor, personnel and other issues that may need to be disclosed. Even if automated tools are used to gather all the financial data for these filings (rather than just the data needed to close the books), this other information requires human judgment to articulate. And not all organizations have knowledge management systems that can track and make such information easily available, says KPMG’s Kuehn.

To speed the process and improve filing accuracy, UTC deployed a legal case tracking system so the status of all legal issues can be found quickly. The company is also using a two-year-old technology standard called the Extensible Business Reporting Language (XBRL) to tag its filings, and that’s a horse of still another color. A NEW BUSINESS LANGUAGE

XBRL has been touted by the SEC as a way to make information more easily accessible to investors and regulators, but there’s a direct benefit to the enterprise itself. XBRL makes all information in a filing accessible through standard, tag-based formatting, as XML does for transaction data. But XBRL also provides structure for validation rules, queries and analysis rules, notes Mike Willis, a Pricewaterhouse¬Coopers partner. If XBRL were introduced throughout the enterprise’s financial closing and reporting process, rather than simply used as a report format after the fact, users would gain new controls and insights into their data, Willis says. “They can automate analytic rules rather than auditing manually, which would reduce costs and speed the process,” he adds. Plus, the use of XBRL would ensure that a company’s reports reach their stockholders (and analysts) unfiltered by third-party aggregators. “It lets companies tell their own stories,” says Willis.

That scenario is probably a year or two away, predicts John Stantial, UTC’s director of financial reporting, since the SEC currently does not accept XBRL reports as the official filing (they can be filed in addition as part of a testing program). In the meantime, companies can use XBRL and convert the data to the SEC’s official format.

Stantial believes an XBRL-based reporting workflow would reduce the time to produce quarterly reports by 20 percent, because the tagged data would let the reporting systems automatically update the financials. Stantial says that companies like UTC typically spend one to three weeks per report on all sorts of government-required information, such as labor statistics, unemployment statistics and tax reporting. “With XBRL, I could push a button and get that in five minutes,” he says.

The SEC is spending $54 million to make its electronic Edgar reporting system XBRL-capable, and the effort to complete the standard SEC reporting taxonomies should be done by June, so Stantial speculates that XBRL-based reporting will begin by 2008. (Gartner has made similar predictions.) And he expects the Department of Labor and the IRS to follow suit.

Beyond making reporting easier, XBRL will improve internal visibility into company financials, Stantial predicts. Although UTC has a fast, five-day close with standard processes, there’s still room for interpretation in what’s reported. For example, an executive may want to know the operating expenses as a percentage of sales for all UTC’s major locations. But “operating expenses” could be interpreted differently. Plus, it can take several days to respond to requests, and the answers may come back in different forms, such as e-mails and Excel spreadsheets, that must then be consolidated manually. But if the various general ledgers and ERP systems in use throughout UTC’s subsidiaries were XBRL-enabled, Stantial wouldn’t have to wait for the financial data to be prepared in UTC’s standard format; XBRL makes it automatically accessible.

Several commercial tools now come with XBRL capabilities, including Hyperion Financial Management, Oracle Financials and Cartesis. Willis and Stantial expect XBRL capability to be built into most commercial financial applications as they are upgraded.

“XBRL is not expensive, and it’s not technical; it’s all there for a layperson. And there’s a very impressive support network out there,” Stantial says, which is why he’s frustrated that few companies have adopted it. Most view XBRL simply as a new data format that no one is required to use, so why spend time looking into it?

But there are signs of increasing interest. “Usage picked up substantially in 2006,” says Jeff Naumann, an SEC technology specialist. He suspects that XBRL’s release around the time of Sarbanes-Oxley doomed it to the back burner for the past two years. GO FAST FOR THE RIGHT REASONS

A faster close is a good indicator of successful financial processes, says PricewaterhouseCoopers’ Harries. But going faster for its own sake should not become an enterprise goal. “If you improve quality and cost, [speed] usually improves, but if you drive for [speed], the others may not improve,” he says.

“When we think about closing, quality comes first,” says Dow Chemical CIO David Kepler.

“In no way should speed ever sacrifice quality. If there’s one lesson learned over the last several years, it’s that the integrity of financial reporting is paramount,” concurs Harries.

“Garbage in, garbage out,” warns KPMG’s Kuehn.

When it comes to a fast close, the bottom line is to empower companies with trustworthy, current information. “Yes, we close faster today, but what we really did is to get information to people faster,” says Kepler, drawing an important distinction for all CIOs and enterprises chasing the faster close. 

Galen Gruman is a California-based freelancer.

Copyright © 2007 IDG Communications, Inc.

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