Taking a Closer Look at the Close

For too many finance people, late nights with Excel and take-out food are still the stuff that period-end financial reporting is made of. Businesses have been trying for years to lop some time off of their close processes without much success; in fact, the time they need to close their books has been rising, according to data from The Hackett Group (reported here).

But more and more companies are taking another stab at the problem, motivated in part by the need to cope with the SEC's now fully phased-in 60-day filing requirement for accelerated filers, which has been a stretch for many finance organizations. "You want to have no material misstatements, but yet you have to do your close fast," says Beth Kaplan, director, audit and enterprise risk services, with Deloitte LLP. "In the old days it was 90 days, so dropping a month off of what would already be a challenge for the close has really hit people hard."

AS5's heavy focus on risk is another driver. "A lot of things, if they're going to go wrong, go wrong in the close process," Kaplan notes. "Companies are asking, 'How can we move activities into or out of month-end and really focus on those areas of highest risk?'"

A new Deloitte report sketches some of the reasons for the growing complexity of today's close processes, including mergers and decentralization, increased regulatory pressure, more complex business models, and a high percentage of manual controls. Small wonder that in a recent Deloitte poll of more than 2,000 finance and accounting pros, less than half said that their company managed to complete its last year-end close on time, with a sufficient review and a manageable amount of risk.

The challenge isn't only finance's, though CFOs often act as if it is. "It's like the last step in a manufacturing process; those performing the close and producing the reports have to deal with the sins of everybody else before them," says Karl Hersch, principal, strategy and operations, with Deloitte Consulting LLP. When a CFO or controller decides to fix the close, they tend to focus on their own shop. "And that's good; that has to happen. But it doesn't take you all the way," says Hersch. "What you have to do to get it right is to push upstream to wherever those financial transactions incept, and you've got to reap your benefits there."

That involves getting buy-in from departments outside the finance domain, and it may mean digging into operational processes and systems. "Organizations can get pretty distracted on these things, and it does take a concerted effort and tone of the top to make it happen," says Kaplan.

Deloitte recommends the following action steps:

• Shift non-critical activities to outside of the close. A hard look at your close process should reveal some tasks that can be accomplished before the end of the period. Some activities, such as reconciliations and fixing inconsistent journal entries, should be done throughout the period.

• Fix problems upstream. Catching and correcting errors at their source can help you avoid last-minute headaches.

• Create a separate workstream for management reporting. Some management reporting activities are not time-critical and can be moved out of the close window so that they don't become a bottleneck.

• Set clear policies and procedures for the close. Tell information providers outside of accounting and finance exactly what data you need, when you need it, and what format it should be in. Establish common cut-off procedures across multiple businesses and geographies.

• Establish a close czar. The close process is complex and extensive enough to need its own designated leader as well as rigorous project management.

• Use automation -- but don't view it as a cure-all. Spreadsheets are pervasive in the close process. They're powerful, flexible tools, but they need careful controls, says Hersch. Companies "often have too many spreadsheets, or spreadsheets that are misused or overcomplicated or disjointed," he notes. The right technology path depends on the company; some organizations may be able to get more from their ERP system, others may opt for a performance management solution. But whatever the decision on that score, companies shouldn't try to use technology to speed up a broken process.

• Involve other parts of the business. Get other functions and business units involved in the transformation project and reviewing its results.

Download the complete Deloitte report here.