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Challenges for Today’s Finance FunctionBalancing Compliance and Performance

ADVISORY

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B A L A N C I N G C O M P L I A N C E A N D P E R F O R M A N C E | 1

Many organizations worldwide are experiencing new challenges as a result of rapidlyevolving regulatory mandates, competing business priorities, and the capital markets’need for transparency in financial reporting information. In addition, organizations’finance functions are facing new challenges and, in many cases, are evolving from afocus that is largely compliance- and accounting-based to one that also encompassesoperations and performance issues.

For organizations that must comply with them, International Financial ReportingStandards (IFRS), the Sarbanes-Oxley Act of 2002 (S-O), and Basel II—as well asaccounting principles and reporting requirements imposed by regional and local regu-lators—pose numerous challenges and drive varying business priorities. Indeed, suchmandates have resulted in a number of persistent challenges for those managing theirorganizations’ financial infrastructures.

These challenges include:

• Excessive, perhaps redundant, financial reporting costs

• Problems in meeting and expediting reporting deadlines

• Limited time for data analysis (due to the amount of time needed for data collectionand consolidation)

• Differences in content between internal and external reporting, requiring labor-intensive reconciliations

• Excessive manual “work-arounds” resulting from too few automated processes,which drive concerns about information quality and auditability

• Time-consuming processes, which are likely redundant or overlapping

• Lack of transparency of financial reporting processes and data

• Lack of effective understanding of accounting systems’ capabilities

• Need for reliable, timely, meaningful information for corporate transactions

These challenges often create “imbalances” between the reporting requirements andthe performance objectives at many organizations—in areas including planning, budg-eting, and forecasting; reporting to management; and external reporting to legal andregulatory entities as well as to shareholders (see Figure 1).

Figure 1: The Performance/Compliance Balance

Introduction

Compliance

Performance

Source: KPMG LLP (U.S.), 2005.

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Organizations have tended to address each new regulatory requirement or businessimperative as separate from other efforts. Time constraints and competing prioritieshave prompted business leaders to focus much of their attention on the “must do”compliance issues (see Figure 2)—often at the expense of creating an integrated, well-balanced reporting environment that achieves compliance and also supports overallbusiness goals.

Figure 2: Driving Performance While Maintaining Compliance

If allowed to persist, this imbalance between compliance and performance can result inmissed opportunities to deliver sustainable value through an integrated financial report-ing function. This tendency may change, however, as organizations increasingly strive todrive business value by achieving a balance between compliance and performance.

Recent regulations have put compliance squarely on the leadership agenda, althoughorganizations may not always perceive its added value. However, regulatory mandatescan be used as a platform for facilitating change and a renewed focus on performance.This paper is the first in a series of KPMG documents to address challenges to thefinance function in today’s environment. It addresses the causes and implications ofimbalances between compliance and performance at many organizations today. Itconsiders how the finance function can better align current regulatory complianceinitiatives so it can begin to reduce costs, improve the speed and timeliness of report-ing, enhance information quality, sustain compliance, and, over time, improve busi-ness performance. It sets the stage for this discussion by addressing some methodsan organization can use to begin integrating its financial reporting—so that the speedand timeliness of financial reporting are enhanced and compliance supports businessimprovement.

Late1990s

IFRS

S-O404

TodayBasel

Compliance

Biased

Compliance

Focused

Performance

and Compliance

Optimized

Performance

Biased

Performance

Focused

Co

mp

lia

nce

Performance


Recent regulations haveput compliance squarelyon the leadership agenda,although organizationsmay not always perceiveits added value.



With regulatory compliance firmly on the leadership agenda, and financial marketsexpecting increased detail and transparency in reported information, organizationshave a new incentive to focus on reporting efforts and to align such efforts withperformance improvement.

Figure 3: Pressures on the Financial Reporting Infrastructure

The need to comply with numerous concurrent regulatory mandates is driving newreporting issues and causing many organizations to experience persistent challengesin managing their financial reporting infrastructures (see Figure 3). Excessive costs,problems in meeting deadlines, manual work-arounds, and lack of data transparencyhave been among the results.

At the same time, continuing business demands put pressure on an organization’s abilityto perform effectively. Globalization is resulting in increasingly complex organizationalstructures and business relationships. Efforts to improve efficiency, in part due to risingcompliance costs, are resulting in efforts to centralize or outsource various functions—thereby shifting labor costs. Competitive pressures exacerbate these challenges.

The Current Environment

Regulations Pressures

CostCu

ttingB

asel II

Local CompetitiveEffi

cienc

y&

Oxley

IFRS

Sarbanes- GlobalizationOutsourcing

Perfo

rmanceC

om

plian

ce

Financial Reporting Infrastructure

“A large number of compa-nies have found it increas-ingly difficult to balance theSarbanes-Oxley complianceefforts with IFRS and localgovernment requirements.”

A.R.C. Morgan European CompaniesSarbanes-Oxley Benchmarking Survey

September 2004




Figure 4 illustrates some of the reporting challenges faced by large multinationals withcomplex group structures, differing information systems, and country-specific legislation.

Figure 4: Multinational Bank with Complex Reporting Environment

Subsidiary B

GLOBAL HEADQUARTERS

UNITED KINGDOM

Subsidiary C AssociateSubsidiary A

Subsidiary B,1 Subsidiary B,2

AUSTRALIAGERMANY UNITED STATES

Legacy systems

Joint Venture Entity

Multinational Bank

Head Office

GAAP

Reporting

Regulatory

Reporting

Management

Reporting

Budgets

and

Forecasts

Corporate

Finance

U.S. GAAPIFRS

U.S.-SEC reportingSarbanes-Oxley (S-O)Basel IITax reporting

Shareholder value reportingConsolidated management reportingProduct/service reporting

Strategic plansAnnual budgetRolling forecastClosing preview forecast

Stock transactionsFinancing transactions

GAAP

Reporting

IFRSU.S. GAAP

reconciliation

Regulatory

Reporting

S-OBasel II

Tax reporting

Corporate

Finance

Joint venture reporting

GAAP

Reporting

IFRSU.S GAAP

reconciliation

Regulatory

Reporting

S-OBasel II

Tax reporting

Management

Reporting

BU reportingProduct/service

reporting

Budgets and

Forecasts

Annual budgetRolling forecastClosing preview

forecast

GAAP

Reporting

IFRSGerman GAAP

U.S. GAAPreconciliation

Regulatory

Reporting

S-OBasel II

Management

Reporting


reporting

Budgets and

Forecasts


forecast

GAAP

Reporting

IFRSGerman GAAP

U.S. GAAPreconciliation

Regulatory

Reporting

S-OBasel II

Management

Reporting


reporting

Budgets and

Forecasts


forecast

GAAP

Reporting

IFRSU.S. GAAP

reconciliation

Regulatory

Reporting

S-OBasel II

ASX Corporate GovernanceTax reporting

Management

Reporting


reporting

Budgets and

Forecasts


forecast

GAAP

Reporting

IFRSGerman GAAP

Regulatory

Reporting

S-OBasel II

Tax reporting

Management

Reporting


reporting

Budgets and

Forecasts


forecast

GAAP

Reporting

IFRSU.S. GAAP

reconciliation

Regulatory

Reporting

S-OBasel II

Tax reporting

Management

Reporting


reporting

Budgets and

Forecasts


forecast

In-house developed system In-house

developed system

Integrated ERP and outsourced source systems

Integrated Enterprise Resource Planning

(ERP) system and specialist

source systems

Integrated ERP system

Integrated ERP system

2nd Tier and specialist source




The need to comply with numerous concurrent regulatory mandates can have a numberof significant implications for an organization seeking to balance compliance with effortsto drive improved organizational performance. These implications can include:

Cost. High costs of addressing increasing complexity and volume of rules and regula-tions, due to:

• Process inefficiencies from multiple reporting processes/systems to accommodateincreasing reporting requirements

• Manual work-arounds for legacy systems that have difficulty handling new reportingrequirements

• Inefficient use of people resources

Speed. Difficulty in meeting reporting deadlines, due to:

• Legacy systems that have difficulty handling new reporting requirements, therebyincreasing the time needed to produce reports

• Lack of the right knowledge and skills to execute quickly

• Lack of training, so staff need more time to do their work

• Challenges in leveraging technology to better enable compliance

Quality. Reduced quality of reporting, due to:

• Differences between internal and external reporting streams and outputs

• Errors from manual work-arounds

• Difficulties in applying complex rules

• Lack of the right staff with the right skills and competencies to understand andinterpret evolving reporting and compliance requirements

To address these challenges, and the opportunities they present, financial leadersneed to assess their finance functions so they can begin to determine how to improvethe balance of compliance and performance. An important aspect of this assessmentis an analysis of the relationship between the finance function and the organizationoverall, as discussed in the next section.


Financial leaders need toassess their finance func-tions so they can begin todetermine how to improvethe balance of complianceand performance.

As the role of the CFO has evolved in recent years beyond the accounting/compliancerealm and into that of strategy and operations, the finance function has become amore significant factor in business operations and performance. As a result, the CFOand the finance function are expected to spend more time on value-driving activitiesversus transaction-processing activities (see Figure 5).

Figure 5: A Shift in Focus for the Finance Function

What’s more, how an organization is organized, structured, and run—that is, whatbusiness model it uses—has significant implications for its finance function as well asits ability to evolve as expected. Organizations worldwide use a variety of businessmodels, which influence how their finance functions are governed and organized,what services they provide, the nature of their financial reporting, the people and skillsets they need, and the risk approaches they use. Organizational business models caninfluence the extent to which the finance function can evolve and thereby drive effortsto balance compliance and performance.

For example, in a highly integrated group with strong centralized management, thefinance function generally has an enhanced ability to drive organizational change. Bycontrast, a finance function in a financial holding group, with legal entities operatingwith a high degree of independence, may face greater challenges in addressing imbal-ances organization-wide.

Once leaders understand the relationship between the finance function and the organ-ization overall, they can begin to consider how they should evolve the finance functionto address imbalances between compliance and performance. The first step is to iden-tify the objectives and the scope of the intended change. As shown in Figure 6, thefinance function may move through a number of stages depending on the organiza-tion’s objectives and the scope of the planned change.


The Changing Role of the CFO And the Finance Function


Business Support/Partnering

Transaction-

processing

tasks

Process

Redesign

Value-Added/

Integrated Systems

Current To Be

Transaction-

processing

tasks

down

Value-

driving

tasks

Value-

driving

tasks

up


Figure 6: The Integration of the Finance Function and the Business

This process can enable the finance function to respond to change and begin to takeon a new leadership role in the organization. As it moves through the stages, thefinance function would begin to spend less time on transaction-processing activitiesand more time on value-driving activities.

Many finance functions today provide a wide range of services to the organization.These services can include the different types of financial reporting, including budget-ing and forecasting, management reporting, GAAP reporting, regulatory reporting, andcorporate finance reporting. These services can also include financial closing andconsolidation, accounts receivable and collections, accounts payable and vendormanagement, fixed asset accounting, travel and expense processing, employee payrolland benefits, tax compliance and planning, treasury and cash management, and finan-cial risk management, among other important activities.

Changing regulations have put the financial reporting aspect of the finance function inthe spotlight in many organizations. The next section focuses on how the challengesin implementing complex regulations have affected the financial reporting infrastruc-ture, thereby contributing to the imbalances between compliance and performance.



Ob

jecti

ve

s o

f ch

an

ge

Transform

Redesign/

Standardize

Streamline

Single

(functions, reporting entities, and reporting types)

Multiple Group-wide

Integration levels


Changing regulations haveput the financial reportingaspect of the finance func-tion in the spotlight inmany organizations.



Complex new regulations, and challenges in implementing them, have helped to driveimbalances at many organizations. The number of financial reports that often must begenerated organization-wide exacerbate these imbalances. Financial reporting outputsand the data flows that produce them can be multi-layered and complex. Figure 7represents a high-level view of the basic building blocks of financial reporting, at boththe group and reporting-unit levels.

Figure 7: Financial Reporting Building Blocks and Outputs

The Complexities of Finance Integration

Budgets and Forecasts

Management Reporting

GAAP Reporting

Regulatory Reporting

Corporate Finance

Data

Management Information Systems

Processes and Controls

Guidelines and Policies

Source Systems (ERP)

Chart of Accounts



GAAP Reporting


Corporate Finance

Data





Chart of Accounts



GAAP Reporting


Corporate Finance

Data





Chart of Accounts


Budgets and Forecasts can include:• Annual budget• Rolling forecast• Operational forecast• Strategic plans• Closing preview forecast

Management Reporting can include:• Shareholder value reporting• Business unit reporting• Product/service reporting• Transfer pricing• Cost accounting

GAAP Reporting can include:• IFRS• U.S. GAAP• Stand-alone statutory reporting per

local GAAP

Regulatory Reporting can include:• Tax reporting• Regulatory reporting (i.e., Basel)

Corporate Finance can include:• Stock transactions• Financing transactions• Mergers and acquisitions

As finance functions cope with increasingly complex rules and regulations, they mayend up with different bases for accounting and reporting as well as different processesand systems to produce reporting outputs. For example, an organization may be subjectto one basis of accounting for external reporting (i.e., IFRS), another for legal or statutoryreporting, and a third for internal management reporting (generally the basis on whichthe business is managed and against which employees are evaluated). In addition, plan-ning and forecasting are sometimes performed using yet another accounting basis.

Significant time pressures and resource constraints augment these problems. Oftenorganizations must cope with the limitations of legacy information systems, amongother challenges. As a result, financial reporting processes to address the new report-ing requirements may evolve on an ad-hoc basis, often resulting in multiple (some-times redundant) processes and manual work-arounds developed to bridge gaps insystem capabilities or to accommodate time constraints.

Understanding the “Building Blocks”

An understanding of the issues underlying these circumstances begins with an analysisof (1) the “building blocks” of financial reporting and (2) how regulatory changes canaffect accounting and reporting.

As outlined in the table on page 10, regu-latory change can affect financial report-ing processes in numerous ways, fromthe initiation of transactions through thegeneration of financial reports.




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Potential Actions to Address

Impacts

Guidelines and

Policies

Processes and

Controls

Management

Information

Systems

Source

Systems

Chart of

Accounts

Data

Potential Impacts from

Regulatory Change

Guidelines and policies are often out-of-date due to changes in rules andregulations, organizations, or systems.

Processes and controls may be out-of-date due to changes in regulationsand systems.

Fragmented information systems withmultiple manual interfaces have evolvedat many organizations. Systems oftenlack standardized configuration andcontrols to support data quality andspeed of reporting.

Legacy systems often require theneed for significant interfaces, includ-ing spreadsheets and models.

Multiple charts of accounts can evolve(at different levels of the organizationand to fulfill different reporting require-ments) as a result of factors includingorganizational structure.

Inconsistencies, inefficiencies, anderrors can result when data is derivedfrom multiple sources and is repeatedlyre-entered—circumstances that arisedue to different reporting requirementsand the ways in which reporting hasbeen implemented through systemsand processes.

Revisions and updates will generally beneeded to help staff understand rules andregulations and how they are imple-mented throughout organizations.

Automated controls—such as balancingcontrol activities, predefined data listings,data reasonableness tests, and logictests—often are embedded within soft-ware programs to prevent or detect unau-thorized transactions.

Existing systems—particularly the largerEnterprise Resource Planning (ERP)systems and high-end general ledger pack-ages—may have built-in capabilities toaccommodate specific accounting andreporting changes. Needed changes mayinclude reconfiguration of existing softwareto enable new reporting requirements.

Spreadsheets and models used bymanagement as an integral part of thefinancial reporting process should beconsidered in a review of requiredsystems modifications.

Interfaces may need to be changed ordeveloped to align with the introductionof new source systems and the de-commissioning of old systems. Changesin existing mapping tables to the financialsystem may also be needed.

Changes to charts of accounts will usuallybe needed due to reclassifications andadditional reporting criteria. Necessarychanges can include creation of newaccounts, extensions in the alphanumeri-cal code used, and deletion of accountsthat are no longer required.

New financial reporting requirements mayresult in:• Increasingly detailed presentation of

information• New data elements or fields to be

recorded• Information to be calculated on a differ-

ent basis

Changes may be needed to allow for thecapture of new or changed data.

Building

Blocks

Up-to-date and well-communicated guide-lines and policies can enable people towork more efficiently and effectively aswell as deliver consistent results organiza-tion-wide.

Implementing automated controls canhelp reduce costs, better manage risk,and provide more predictive businessinsights. Process standardization canhelp ensure common standards forcomparable reporting.

Standardizing information systems andrelated systems controls can help elimi-nate manual processing errors, reducecosts, and improve reporting timeliness.

Elimination of interfaces can result infaster data flow and reduced error risk.

Standardizing charts of accounts can helpreduce manual intervention in the financialreporting process.

Aligning master data requirements formultiple types of financial reporting canresult in reduced errors and faster dataflow, thereby helping to improve reportingcycle times.

Potential Benefits for Compliance

and Performance

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Organizations have differing structures, systems, and industry-specific circumstances,which prevents a one-size-fits-all approach to finance integration. In addition to strategicdecisions concerning, for example, modifications to existing systems or the purchaseor development of new systems, management will need to consider tactical issues,including:

• The most appropriate method to harmonize internal and external reporting

• Whether changes are made at the group, company, or the source-system levels

• How to deal with dual-reporting requirements

• How to deal with the cut-over approach from a general ledger under one GAAP to a general ledger under another GAAP

• How to manage the risks of model-driven solutions

Systems, Processes, and People

Addressing these issues early in the integration project life cycle can help enable lead-ers to better address the impacts to systems, processes, and people as well as limitunnecessary costs resulting from duplication of effort or changes in approach at a laterstage. Needed efforts will vary according to:

• Organization size

• Industry

• Level of finance integration within each country

• Existing information-systems preparedness for finance integration

Consideration needs to be given to:

• The purchase or development of new systems or modification of existing systems

• Modification of processes and controls

• Updates to guidelines and policies

• Vendor maintenance and ongoing support

• Ensuring that people with the right skills are in place

• Training needs

• Project management

• Whether to implement a short-term solution to meet tight deadlines as well as amore robust long-term solution to the same problem

The strategic and tactical decisions relating to finance integration should be conductedwithin the organization’s governance framework to closely align any significant changeswith the organization’s strategic business goals.

Determining Where to Initiate the Change

Changes to the financial reporting infrastructure such as those discussed above can bemade at different levels in an organization’s financial reporting process—at, for exam-ple, the group level, the company level, or at the source level (see table on page 12).

Making the Change



Figure 8: Integration Levels

Group Consolidation System

Country A

Group Financial Reporting

Country B

Entity I

using system x

Local GAAP

financial

reporting

Entity II

using system y

Local GAAP

financial

reporting

Entity III

using system z

Local GAAP

financial

reporting

Adjustments Adjustments

Local GAAPGroup Financial Reporting


Group Level

Individual entities prepare financial report-ing based on local GAAP. This financialreporting is converted to another GAAP,such as IFRS or U.S. GAAP, during thegroup consolidation process.

Organization Suitability

• Individual entities in certain countriesdo not have to report separately

• Only a few simple adjustments arerequired and are made top-level duringthe consolidation

• Information to make conversion adjust-ments is readily available

Reporting-Unit Level

Individual entities prepare financial report-ing based on local GAAP and thenconvert that information to another GAAP,such as IFRS or U.S. GAAP, before send-ing the reporting to the group level forconsolidation.


• Individual entities in each country arerequired to report separately

• Group structures are complex

• Consolidated entities are numerous

• All required source data is readily available

Source Level

Individual entities make changes tosource systems to enable GAAP account-ing and reporting, such as U.S. GAAP orIFRS, from source systems.


• Daily financial statements are required

• Complex calculations affected byreporting requirements are performedat the source

• Capturing new data requires changesat the source

• More practical when source systemsand the general ledger are fully integrated

Integration at Group Level

Integration at Reporting-Unit Level

Integration at Source Level

Country A Country B

Entity I

using system x

GAAP financial

reporting

Local financial

reporting

Entity II

using system y

GAAP financial

reporting

Local financial

reporting

Entity III

using system z

GAAP financial

reporting

Local financial

reporting



Country A Country B

Entity I

using system x

GAAP financial

reporting

Accounting at

source


Entity II

using system y

GAAP financial

reporting

Accounting at

source




Organizations will increasingly strive to drive business value by achieving abalance between compliance and performance. Increasingly, many leaders willfind that regulatory mandates can be used as a platform for facilitating change aswell as a renewed focus on performance. Organizations should seek to maintainthe momentum they achieved during GAAP conversions and other reportinginitiatives and aim for improved alignment among such initiatives (sharing scarceresources in the IT and finance departments).

Closing the gap between compliance and performance can help reduce costsand facilitate a transition to a single platform for all financial reporting needs. Anintegrated, well-balanced reporting environment that achieves compliance andalso supports overall business goals is a result that would help drive value for allstakeholders.

Key Questions

Balancing compliance with performance through finance integration should encom-pass four dimensions—accounting and reporting, systems and processes, people,and business impacts. A number of important questions can help leaders addressthese dimensions:

Accounting and Reporting

• Is our organization able to sustain compliance with changing regulations?

• Do we meet reporting deadlines on a timely basis?

• To what degree do we produce high quality, accurate reporting?

• Are our stakeholders able to understand our organization and performance basedon our reporting?

Systems and Processes

• How can we standardize and simplify our systems and processes?

• How can we improve our degree of automation?

• Do we have a group-wide chart of accounts?

• Are data sources consistent for multiple types of reporting?

• Can we use shared services to improve aspects of our finance function?

People

• Do we have the right staffing levels?

• Do we have the right people with the right skills to address complex accountingand reporting requirements?

• To what degree does our finance staff have an in-depth knowledge of the business?

Business

• How can we create better and faster management information?

• How can we better align our management incentives with our external reporting?

Conclusion

Compliance Performance




Appendix I: Compliance Initiatives—Pressures on the Financial ReportingStructure

The need to comply with numerous concurrent regulatory mandates is driving newreporting issues and causing many organizations to experience persistent challengesin managing their financial reporting infrastructures. Issues specific to certain regula-tory initiatives are outlined below:

IFRS

Conversion to the International Financial Reporting Standards (IFRS) poses a signifi-cant challenge for organizations globally, due to:

• Complexities in the technical accounting standards themselves and difficulties inconverting systems and processes to accommodate these complexities

• Domiciles of organizations

• Reconciling IFRS reporting with local and international regulatory considerations

• The extent of differing information systems within an organization

• A lack of skilled programmers and IFRS professionals

IFRS conversion projects are often viewed as finance-specific projects rather thanbusiness initiatives. However, these projects also affect information systems andhuman resources as well as associated supporting processes and functions. In somesituations, IFRS conversion projects can fundamentally change the way some busi-ness units operate.

U.S. GAAP

Companies that are listed on a U.S. stock exchange are currently required to producefor submission to the Securities and Exchange Commission (SEC) a reconciliationbetween their local reporting standards and U.S. GAAP. When reporting for IFRS, forexample, these countries will be required to amend this reconciliation of local GAAPto U.S. GAAP to become one that reconciles IFRS and U.S. GAAP. These organizations’information systems must be able to record or generate information at an appropriatelevel to allow this change in reconciliation.

Basel II

The Basel II Accord is an evolving regulation relating to the capital adequacy of interna-tionally active banks. Basel II has different objectives than GAAP reporting, althoughtheir frameworks share some characteristics. As a result, organizations will havesubstantial overlaps in data and reporting requirements. Systems and processesshould have the capability to cope with the demands of these differing reporting typeswhile helping to eliminate duplicate work.



Sarbanes-Oxley (S-O) and Other Corporate Governance Legislation

Many countries may be affected by corporate governance legislation, which oftenrequires management to develop a sound system of internal controls around financialreporting.

For example, section 404 of the Sarbanes-Oxley Act of 2002 requires management todocument and assess internal controls over financial reporting, report on the assess-ment, and subject the assessment to audit by the organization’s independent auditor.Significant changes in financial reporting, such as implementation of new accountingstandards, may negatively affect a significant proportion of the internal controls overfinancial reporting due to:

• Excessive use of uncontrolled end-user models (e.g., spreadsheets)

• Extensive changes to systems andprocesses, potentially disrupting existing controls

• Manual work-arounds, increasing risk of error

• Lack of available skilled resources



The case studies below help illuminate how the finance functions at a variety oforganizations have sought to balance compliance with performance.

Case I: Harmonization of External Reporting and Management Reporting

A large multinational organization faced significant differences between externalreporting and management reporting, after having implemented parallel processes andsystem work-arounds in the course of its conversion to IFRS. Especially:

• Where mappings have changed from the source system to the general ledger,mappings to the management reporting systems and the data warehouse werechanged

• Alterations to calculations and the addition of new data in source systems, as wellas new timing of data feeds, affected key ratios and percentages in internal reports

• Where the primary accounting principle for internal and external reporting differed,complex reconciliations were required to align them

Thus, the organization sought to realign external and management reporting, using thesame or a similar basis and no manual work-arounds. This basis should also be used forthe organization´s value-based management systems.

ApproachThe organization took the following path to integrated reporting:

• Integrated closing process: comprehensive analysis of existing internal and externalfinancial reporting processes as well as an assessment of opportunities to integratethose processes

• Group-wide reporting requirements: definition of details of the new reporting struc-ture, including analysis of reporting outputs and the necessary line items for eachreporting output

• Master data harmonization: definition of group consolidation structure and level ofdetail needed for each financial reporting line item; harmonization of charts ofaccounts; definition of which key performance indicators should be used and howto calculate them

• Optimization of systems and processes: this complex task included establishingsignificant interfaces between finance and information systems’ functions acrossthe entities and segments

• Guidelines and training: updating guidelines and training of finance personnel in theimplementation and maintenance of changes to the reporting processes

ResultsThe organization enhanced its reporting speed through significant reduction of paral-lel processes. Moreover, it realized efficiency gains through more effective use offinancial personnel, so that reconciliation work can be replaced by in-depth analysisof results. Finally, the organization improved the quality of its closing information, asreported data can be used both for internal and external purposes.

Appendix II: Case Studies



Case II: Reducing Costs While Maintaining Reporting Quality

A European conglomerate was faced with reinventing its finance function, which wasdistributed over a range of business units. It sought to achieve the following:

• Improve overall cost efficiency and ensure efficient use of resources

• Enable consistent enterprise control by ensuring common management reportingand evaluation standards

• Ensure consistent GAAP reporting for statutory consolidation

ApproachThe organization took a “shared services approach” to integrating its finance organiza-tion and processes and systems. To do so, the organization:

• Identified a range of finance shared services scenarios, evaluated their costs andbenefits, and determined how to implement shared services

• Developed a detailed project plan for integrating financial reporting as well asfinance systems and processes while implementing a common finance organiza-tional structure

• Adopted common financial reporting standards based on GAAP and managementconsolidation requirements

• Defined roles and responsibilities within the finance shared services processes aswell as within preliminary and downstream processes

• Developed process definitions for finance shared services, taking into account IFRS,local GAAP, and management reporting requirements

• Executed a program to bring the existing SAP ERP systems in line with the financeprocesses and implemented interfaces to common reporting systems as well as acommon chart of accounts

• Took steps to manage the change to organizational structures, processes, andsystems

ResultsThe organization achieved efficiency gains of about 25 percentin the finance function while helping to ensure consistentcompliance with IFRS, local GAAP, and management reportingrequirements through common processes and standards. Itbenefited from an integrated approach to addressing organiza-tion and processes as well as IT systems in the context oflegal and management requirements.



Case III: Enhancing the Organization’s Ability to Respond to Volatility of

Results Through Improved Budgeting and Forecasting Processes

A financial services organization was confronted with increased volatility in its resultsas a result of internal and external factors. The introduction of IFRS fair value methodshad increased this pressure and widened the gap between external regulatory report-ing and internal management reporting. To address these pressures, the organizationsought to achieve the following:

• Establish an enhanced budgeting and forecasting reporting process with both finan-cial and non-financial elements

• Generate reporting that is lower cost, more timely, and compliant with regulatoryrequirements

ApproachThe organization took the following steps:

• Determined the requirements, information needs, and expectations of theenhanced budgeting and forecasting reporting process

• Developed a blueprint of the enhanced budgeting and forecasting process

• Developed process definitions, taking into consideration external reporting (IFRS/U.S. GAAP), local GAAP, and management reporting requirements

• Devised system blueprints for the required systems adaptations (which includedevolving from multiple charts of accounts to one standard chart of accounts,embedding manual work-arounds, and moving from multiple data sources to singledata sources and automated flow-through). These blueprints took advantage of new,innovative techniques designed to produce more reliable prospective performanceinformation, including impairment testing to identify and incorporate decreases invalue of major business assets, sensitivity analyses intended to support manage-ment in controlling fluctuations in future cash flows, and hedge and economicvalue-added models to determine actual value of assets.

• Defined new roles and responsibilities within the new process

• Redefined the skills and competencies needed within the finance function

ResultsAs a result of implementing improvements to the budgeting and forecastingprocesses, the organization achieved the following benefits:

• Enhanced ability to respond within a changing environment (credit institutions,business analysts, shareholders, and other stakeholders)

• More timely production of budgets and forecasts

• Improved quality of data

• Improved compliance with regulatory requirements

• Increased efficiencies and reduced costs



Case IV: Financial Integration to Facilitate an Acquisition

A large multinational company sought to acquire an owner-managed business (whichwas not subject to mandatory conversion to IFRS and thus was using local countryGAAP). Due diligence efforts revealed that to complete the acquisition decisionprocess in a timely manner, the company needed first to assess the impact of variousaspects of converting the target’s financial information into IFRS and U.S. GAAP andof applying purchase accounting. Following the acquisition, the target’s financialreporting would need to be integrated based on the acquirer’s GAAP and manage-ment accounting.

ApproachThe acquiring organization took the following steps to address challenges within thetarget:

• Valued the target’s intangible assets—including trademarks, customer lists, andtechnology—and made assumptions about the future of those assets to determinewhether they must be amortized

• Conducted a high-level impact analysis of GAAP conversion andpurchase price allocation

• Converted the financial statements to both IFRS and U.S. GAAP

• Modified the target’s existing systems and reports to mesh with itsown needs

• Created internal and external reports for forecasting/planning suitablefor integration in the acquiring company’s forecasts and budgets

• Addressed issues of corporate governance and risk management

• Implemented controlling reports and developed forecasts in accor-dance with the acquirer’s management reporting

ResultsThe target was able to meet reporting deadlines to enable the acquirer tocomply with internal and regulatory reporting requirements.

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Visit KPMG on the World Wide Web at www.kpmg.com.

KPMG ContributorsManfred Hannich, KPMG in Germany

Alexander Riedel, KPMG in Germany

Martijn van Wensveen, KPMG in the Netherlands

Egidio Zarrella, KPMG in Australia

Simon Martin, KPMG in Australia

Jochen Pampel, KPMG in Germany

Colleen Drummond, KPMG LLP in the United States

Diane Nardin, KPMG LLP in the United States

Carole Law, KPMG LLP in the United States

The views and opinions are of those interviewed and do not necessarily represent the views andopinions of KPMG member firms.

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