why financial close matters
TRANSCRIPT
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Issue
Leading companies have taken advantage of recent innovations
in technology and process design to ease the burden imposed
by the financial close and reporting process. Regrettably, many
companies continue to rely on inefficient processes plagued
by decentralization, aging technology and overreliance on
manual activities. The end result includes an extensive close
cycle time, inadequate analysis of results, high turnover and
costly errors in reporting. Migration to the next plateau of
maturity – “closing the books completely and efficiently” – is
typically not an easy leap. This is understandable in high-
growth scenarios, where already–scarce time is focused on
increasing revenues, expanding operations and integrating
new business units.
Reluctance to resolve these issues is generally attributed to
one or more common culprits – budgetary constraints,
cultural adversity to change, lack of resources, etc. Often left
unaddressed – “we’ll focus on the close process after the IPO…”
– these issues are heightened with the increasing scrutiny and
reporting requirements that come with being a public company,
and can easily be carried over into the public environment,
escalating the severity of the risks and limiting the ability of
finance to focus its time on value-adding activities. It is important
to note that an inaccurate close process can have an impact on
the timing of an organization’s S-1 filing.
Risk
The lack of a disciplined financial close process exposes a com-
pany to a number of risks related to the quality and timeliness
of its financial reporting:
• �Completeness�and�accuracy/quality – As the close process
involves all the key activities for recording periodic financial
results, a key question is: “Do we feel comfortable that all
key close activities – e.g., reconciliations, manual journal
entries, account analysis, etc. – have been completed and
adequately analyzed and reviewed? Is there a risk that material
transactions have not been recorded because leadership did
not have visibility into the status of the close process?”
• Timeliness – Public companies are subject to a strict set of
deadlines that impose additional time constraints on finance
and accounting personnel. These include:
– Enhanced governance processes, such as Sarbanes–Oxley
(SOX) Section 302 certification and more thorough prepara-
tion for management discussion and analysis.
– External auditor testing and review – Delays in the financial
close have a direct impact on the efficiency of the audit.
– Management/audit committee review – Adequate time
must be allocated for management and the audit commit-
tee to provide a meaningful, value-added review
of financial results.
• Control�efficiency – A number of key and entity-level controls
relating to the financial close are usually tested regularly
as part of SOX 404 compliance. If the external auditor is not
comfortable with the governance of the financial close and
consolidation process, the company can quickly be exposed
to a risk of a material weakness. Strong entity-level controls
enable a company to manage the process with a smaller set
of controls, permitting greater internal process efficiency as
well as greater efficiency in the audit (i.e., fewer controls for
the external auditor to test).
• �People – Without a comprehensive understanding of the
composition and detail of the close process, it is difficult for
a company to assess the volume and complexity of the work,
and thus the nature and experience required to manage and
perform the activities. Many companies experience high
error rates in close procedures due to inappropriate task
assignments. Uneven workload distribution can also lead
to employee job dissatisfaction and low morale, further
jeopardizing the quality of the work performed. In some
cases, the lack of appropriate skills can lead to the risk of
a material weakness.
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Why the Financial Close Matters
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p. 2
• Executives can monitor the close on a daily basis using
dashboard reporting metrics.
• The process and documentation can be used to establish a
strong foundation for SOX 302 certification, and inclusion
of key review activities promotes a clear testing plan for SOX
404-related requirements.
• The company can use information obtained from the
tracking of historical performance to assess opportunities
for improvement in efficiency en route to meeting corporate
as well as SEC filing deadlines.
Checklist Format
The first step in developing a checklist is to understand the
overall rollups and accountabilities. For example:
• Do business units, individual locations and shared service
centers need their own checklists?
• Is there value in consolidating checklists for all entities,
locations and divisions into one master checklist?
• Who within the organization “owns” the close process and
is responsible for ensuring that tasks are completed in a
timely manner?
Once the tiers and level of detail required for the checklist
are agreed upon, the next step is to design the format for the
standardized checklist. To produce effective reporting, the
checklist design should remain simple but detailed enough to
capture relevant data for each activity type (e.g., reconciliations,
manual journal entries, etc.).
The value of the checklist is that it enables task-level management
of the close process, which enables the monitoring of daily
performance, as well as the capture of performance data that
companies can use to highlight areas that may benefit from
process re-engineering.
A leading practice is to establish the position of a close manager
in parallel with the creation of the close checklist. This individual
is responsible for ensuring completeness of the close each
month by monitoring performance during the close via daily
status meetings and issue resolution checkpoints. This leader
also works to improve performance continually by analyzing
month-to-month performance against plan targets and
recommending/implementing process changes.
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Our Point of View
Our experience shows that significant risk mitigation can be
achieved by building (and managing against) a detailed close
activity checklist. Pre-IPO and newly public companies alike
have perhaps the most to gain, as they can least afford to have
a bumpy ride on the road to their first filings.
Common Challenges
Most companies have a “calendar” and many have a “check-
list,” but few actually have a process that enables/provides:
• Daily monitoring of the close process at an activity level
• Identification of dependencies
• Documentation that can support management control and
review requirements
• Historical data capture that can be used to analyze and
review the close process and performance
Often, the long cycle time and inefficiencies are driven by
unclear responsibilities as well as a lack of clarity in the close
process and company timelines. Challenges include:
• Limited oversight/monitoring
• Due dates that are moving targets
• Extensive reliance on manual processes
• Lack of the “big picture”
• Dependencies not understood
• Checklist version control
• Low-priority tasks in the critical path
• Inefficient use of resources
Leading�Practices�to�Consider�When�Establishing��
a�Close�Checklist
Leading companies take a foundational approach to resolve
these challenges and mitigate their risks by employing a
comprehensive close activity checklist. In an ideal situation,
the company employs an automated tool designed specifically
for close task management. At the very least, a self-reporting
approach (e.g., through a shared Excel file) can generate daily
progress and exception reports. Companies can achieve the
following benefits using either option:
• Management can establish a consistent, activity-based
process that reports on progress and challenges.
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p. 3
Contacts
Steve Hobbs
+1.415.402.6913
Scott Graham
+1.469.374.2432
Ken Conway
+1.602.683.4134
Eric Williams
+1.513.362.1717
About Protiviti Inc.
Protiviti (www.protiviti.com) is a global consulting firm that
helps companies solve problems in finance, technology,
operations, governance, risk and internal audit. Through
our network of more than 70 offices in over 20 countries,
we have served more than 35 percent of FORTUNE® 1000 and
Global 500 companies. We also work with smaller, growing
companies, including those looking to go public, as well as
with government agencies.
Protiviti is a wholly owned subsidiary of Robert Half Internation-
al Inc. (NYSE: RHI). Founded in 1948, Robert Half International
is a member of the S&P 500 index.
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Management Dashboards
Capturing the activity checklist in a spreadsheet enables
preparation of a close dashboard that provides the organization
with a high-level view of when clusters of close activities are
actually performed. Dashboards can be used to monitor
performance by region, function, activity category, individual,
etc. These reports provide effective support to the daily close
status meetings and are useful in identifying opportunities for
smoothing the allocation of tasks, clarifying dependencies and
redistributing the timing of activities.
A step up from spreadsheets are tools that would have been
classified as “emerging” several years ago (e.g., Blackline and
Trintech). These tools now offer mature products for close tasks
and should be considered the next step beyond spreadsheets
for organizations with more than 100 recurring close activities.
Conclusion
A disciplined financial close process is instrumental in effective
and efficient financial reporting. If the full range of close activi-
ties is not documented or well-understood, management will
have difficulty both in controlling the process and identifying
the root causes of delays. Our experience shows that a check-
list promotes a process-driven culture that enables:
• Visibility of workload and measurability of performance
• Transparency of the audit trail and ability to identify focus
areas to improve overall productivity
© 2012 Protiviti Inc. An Equal Opportunity Employer. PRO-0912-107129
Protiviti is not licensed or registered as a public accounting firm and does not issue opinions on financial statements or offer attestation services.
Gary Callaghan
+1.571.382.7228
Charles Soranno
+1.732.275.2792
Brad Rachmiel
+1.312.476.6425
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