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Reconciling accounts at the end of a period is one of those mundane finance department tasks that are ripe for automation. Reconciliation is the process of comparing account data (at the balance or item level) that exists either in two accounting systems or in an accounting system and somewhere else (such as in a spreadsheet or on paper). The purpose of the reconciling process is to identify things that don’t match (as they must in double-entry bookkeeping systems) and then assess the nature and causes of the variances. This is followed by making adjustments or corrections to ensure that the information in a company’s books is accurate. Most of the time, reconciliation is a matter of good housekeeping. The process identifies errors and omissions in the accounting process, including invalid journal postings and duplicate accounting entries, so they can be corrected. Reconciliation also is an important line of defense against fraud, since inconsistencies may be a sign of such activity.

But let’s be frank: The reconciliation process is tedious. As for all tedious processes in modern corporations, it makes sense to let machines do this work. Reconciliation is a part of the accounting close process, and one of the main benefits of automation here is that it can accelerate the process. This is important because our benchmark research on closing finds that it’s actually taking longer for companies to close their books than it used to. The research also shows a correlation between the degree of automation in the close process and the time it takes to complete it.

vr_fcc_financial_close_and_automation_updatedBack in the days of quill pens and blotters it might have been manageable to meticulously comb through accounting entries. Today, however, volumes of data are too great to make this realistically feasible, and technology provides accountants with faster and more effective means of spotting patterns and familiarizing them with the peculiarities of the company’s books. For CFOs and controllers who are trying to determine how to begin the process of transforming their department to make it a more strategic player in their company, here is a way to free finance staff to do more productive tasks.

There are three important virtues associated with automating reconciliation. The first is consistency: Business rules, policies and procedures are applied consistently in ways that are in line with accounting policies that external and internal auditors accept. Machines are more reliably consistent than humans in such tasks. The second virtue is elegance: Automated systems simplify the process while making it faster and more accurate. They enable auditors to focus their time and attention on the most important issues that arise from the process. The ability of automated systems to highlight exceptions eliminates the need for random sampling, which both consumes time and poses the risk that something important will go unnoticed. The third virtue is efficiency: Automated systems enable a company to substantially reduce the amount of time needed to complete the reconciliation of accounts because the system performs the purely mechanical tasks and skips the accounts in which there has been no activity or in which the amounts to be reconciled are too small to be material. These systems also reduce the time internal and external auditors need to check reconciliations because all of the work is centralized in a single system and because the system and its configuration functions as a higher level of control in the reconciliation process that’s easy to test and monitor.

Despite these obvious virtues, most companies don’t use such capable automation. The majority manage reconciliations in spreadsheets shared through email. Electronic spreadsheets were a major advance decades ago. Today, however, they are not the best choice because the information they contain is fragmented, difficult to consolidate, hard to share and prone to error. Running this process with spreadsheets and email is more difficult and time-consuming to manage and control than using a dedicated reconciliation application. A well-designed dedicated application assigns ownership of every task to individuals and provides real-time visibility into which parts are on schedule, which are behind and which may be in danger of falling behind schedule. These systems employ templates that are centrally controlled to ensure consistency and quality. The templates can be updated as needed. A spreadsheet may start as a template, but it’s difficult to control them, even with protections built in.

Documentation is another weak spot in spreadsheets shared through email. Although there are objective aspects to the reconciliation process, those performing it ultimately must use their judgment. These judgments must be supported by narratives and calculations that clearly and completely explain the decisions each person made and by citing supporting documents wherever necessary. A related aspect is approvals, since good governance and control of accounting systems requires that someone inspect and approve the work of others when their actions (or lack of action) can have a material impact on the quality and accuracy of financial statements. So another important element that a dedicated reconciliation system can provide are approval workflows to ensure that the work has been completed before the books can be closed.

Automating reconciliation can be a first step in creating a virtuous cycle. Many executives in finance organizations would like to improve the performance of their department but face the challenge of finding the time to devote to such efforts. The staff time that can be saved through automation can be reinvested in finding the root causes of other issues that bog down the department and fixing them. Automating reconciliation can accelerate the financial close, improve productivity, reduce errors and the related possibility (albeit limited) of financial misstatements, enhance control and diminish the risk of financial fraud. These are reasons enough why all midsize and larger corporations should investigate the benefits of dedicated reconciliation software.

Regards,

Robert Kugel – SVP Research

Earlier this year we published our Trends in Developing the Fast, Clean Close benchmark research findings. The most significant was that, on average, it takes longer for companies to close their books today than it did five years ago. In 2007, nearly half (47%) we closing their quarters within five or six days, but now only 38 percent can do it as quickly.

Some think that the increase in the time it takes to close is the result of increased regulation and other fallout from the financial collapse in 2008. It’s a reasonable hypothesis, but the numbers from our research don’t bear this out as the major factor in the increase. It’s true that half (49%) say that economic and regulatory events over the past five years have increased their workload, but only one-third of these report any lengthening of their closing period. So, while external issues are a factor, they don’t appear to be a major reason for the slower close. Looking at the results of the benchmark research, companies that experienced an increase in their closing period are ones that are more likely to use less automation and have more manual processes. Many finance organizations, especially in North America, reduced staffing in the wake of the 2008 recession and have been reluctant to rehire ever since. This means fewer people handle the workload. Rather than redesigning the process, using better information technology to support the close or managing the process more effectively, these companies are putting up with a slower close.

For companies that take more than a week to close their books, the financial close is more of an opportunity than a problem. I assert that the close is a useful measure of the overall effectiveness of a finance organization. Take two companies and assess their close processes. On paper the two corporations may be nearly identical: same size, same industry, same geography, same ownership structure, same number of ERP systems, same degree of centralization of the accounting function and so on. One closes in three business days; the other in 11. Why?

There’s a real danger is thinking that a close that takes more than a week or one that’s lengthened over the past couple years is the result of external factors. In effect, it excuses poor internal performance as the inevitable result of external factors. I submit that most of the difference between a company that takes three days to close and one that takes 11 is the result of management decisions that amount to this: Closing faster is just not important enough to warrant the effort. I also suspect that if I proposed this interpretation to the controller of the slower company, he or she would tell me that it’s not entirely true. They tried to improve closing speed but they found that it wasn’t feasible because of [fill in the blank]. Some reasons might be that (for example) it takes that long to do inventory or to complete the allocations or to perform reconciliations. Yet behind the fill-in-the-blank explanations are deeper issues that likely dog the overall effectiveness of the finance department. For instance, using desktop spreadsheets to collect data, resolve disparities and perform analytical tasks such as calculating allocations adds time to the process compared to using dedicated software to automate this function or, at the very least, using an enterprise spreadsheet. An inability to get data in a timely fashion is not a given. Even something as basic as failing to rethink the process can be a cause for a too-long close. It’s not “cheating” to close subledgers before the end of the period, provided it’s done consistently and doesn’t inherently result in a misstatement. Accuracy is not negotiable in bookkeeping but materiality must guide decisions in accounting. Setting higher thresholds for reconciliations can save a substantial amount of time without adversely affecting the quality of a company’s financial statements. A relentless drive to shorten the close also requires executives to rethink and question a lot of “givens” that routinely degrade their performance. “Relentless” means that it becomes a high priority that challenges a “we’re too busy to improve efficiency” mentality.

I propose that every company that takes more than a business week to complete its monthly or quarterly close should set a goal of reducing the time by at least two days over the next three years. If it takes 11 or more days, it should be four days. Shortening the close is worthwhile for three reasons. It enables a company to provide vital financial and managerial information sooner and increases efficiency. Moreover – and possibly of even more value – the process of identifying the issues and bottlenecks that prevent a faster close is also likely to point to other peopleprocessinformation (data) and technology issues that hamper a finance organization. Fixing the close process issue can be an excellent diagnostic tool for everything else that might be ailing finance.

Regards,

Robert Kugel – SVP Research

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