By BearingPoint

Regardless of the size of an organization, the process of periodically closing the books is an important activity that provides the basis for a company's financial and management reporting. Meeting this important responsibility requires the establishment of:

• A detailed close process.
• Supporting systems and tools.
• Appropriate accounting and technical skills.

By applying leading practices to the close cycle, supplemented by the appropriate tools and training, organizations can achieve the following important business benefits:

• Visibility   A well-designed close process, supported by strong systems and tools, provides management with visibility not only into financial results, but also into the underlying operating metrics that drive those results.
• Faster decision-making   A properly designed process allows the close cycle to be completed within three to six days, giving management time to quickly assess results and take action as required.
• Increased productivity   Reducing the workload burden associated with a poorly designed or nonautomated close process lets the controller and the accounting team spend time on more strategic efforts, including deeper analysis of the financial results.

Common issues inhibiting the close cycle

Numerous factors can make the seemingly simple process of closing the books difficult to accomplish in a timely or effective manner. These factors can be divided into three categories of issues: process, technology, and people.

Process issues

• Undefined process   While organizations understand that the close process begins on the day after the period ends, the absence of a clear timeline driving an organization to close its books within a reasonable time can lead to disarray and extended close times.
• No clear process ending   Many organizations blend the development of management reporting with the close process. Managers can be tempted to reopen the books to provide more acceptable numbers, causing the close cycle to become iterative and lengthy. In light of new requirements such as Sarbanes-Oxley, such a close process raises not only ethical issues but regulatory ones as well, which could lead to major consequences such as fines, delisting, and even jail time for executives.
• Lack of ownership   The close process is a set of activities that should be conducted in a proper order by a certain time. Unless the activities are clearly defined with assigned owners, steps might be missed, causing havoc with the close process. A lack of clear ownership also leads to eventual finger-pointing when a mistake occurs.
• Lack of supporting documentation   During the month end, a high percentage of the organization's closing entries, such as booking depreciation, are repetitive. Some entries, such as calculating a deferred tax liability, are complex. Companies often reinvent the wheel every month during the close process, adding variability to the results and time to the process.

Technology issues

• Improperly designed Chart of Accounts   The Chart of Accounts (COA) provides the framework for a business's financial reporting. For small businesses in common industries, a generic COA typically serves closing requirements well. However, as businesses grow and evolve (often into multiple industries), the COA often either retains its immature form or acquires so much detail that it becomes cumbersome to maintain.
• Multiple systems of record   Many growing companies add systems to meet isolated business needs, without considering how data will be reflected in the general ledger. Data that is required to ensure proper accounting might then become trapped in systems outside of the application that is used for closing the books. The required manual consolidation adds time to the close process and provides opportunity for error.

People issues

• Lack of system training   Team members aren't comfortable with the systems being used.
• Lack of accounting training   Team members lack the technical accounting skills required to handle complex close issues.
• Lack of cross-training   Team members don't understand each other's roles, creating difficulty when members are unable to complete their specific close process activities.

Address obstacles with leading practices

Try implementing these leading industry practices to overcome the following common obstacles.

Undefined close process with no clear ending

• Document and communicate the close process.
• Publish a close calendar and checklist.
• Handle management reporting and forecasting outside of the close process.

Lack of ownership

• Clearly define roles and responsibilities by assigning each activity within the close checklist to an individual.
• Sign off on the checklist after each activity is closed. Provide an updated copy of the checklist to the controller at the end of each business day during the close cycle.
• To assist with resolving issues, establish ownership for all accounts and ledgers that make up the financial statements.
• Assign ownership of suspense accounts, which should be used rarely.

Lack of supporting documentation

• Document all standard and recurring closing entries, which should be included in a close manual.
• Formally document and institute materiality levels for different accounts (or even business units).
• To reduce bottlenecks during the close process, record adjustments locally.
• For companies with multiple business units, conduct allocations based on a predetermined plan.
• To supplement manual documentation, maximize the use of technology in posting standard and recurring journal entries, and in performing eliminations.

Improperly designed Chart of Accounts (COA)

• Review how well the COA maps to the business.
• Restructure the COA by consolidating duplicative accounts, eliminating excessive detail, and creating new accounts that logically fit the business model. (Note: While this step sounds rudimentary, achieving this objective is not easy.)
• For organizations with multiple business units, institute one global COA that provides the flexibility to meet corporate and local business needs.
• Maintain central control of the COA, requiring executive sign-off on any change requests.
• Create and continually assess data standards for accounts and transactions, to ensure that transactions are properly captured within the general ledger.

Multiple systems of record

• To avoid keeping accounting data in multiple systems, use a single source for both statutory and management reporting (for example, one data and process flow).
• Automate the posting of subledgers to the general ledger.
• Create a high-level COA within a consolidation application, which allows for the automated roll-up of multiple databases. (Note: This can be a complex and expensive project.)
• Consolidate accounting databases whenever possible to allow easier management reporting and drilldown. Multiple databases make it difficult to uncover the source transactions that make up an account balance within the financial statements.
• For global organizations, perform currency translation centrally.

Lack of system and technical accounting training

• Develop an annual training curriculum tailored toward specific job requirements for each accounting employee.
• Design the curriculum to accommodate external education requirements such as the continuing professional education necessary to maintain one's CPA license.
• Ensure that system training is included within the curriculum.
• Be sure to include training with the deployment of any new financial systems or tools.

Lack of cross-training

• Identify backup resources for all activities when designing the close checklist and assigning activity owners.
• Assess whether substantial skill gaps exist for key close activities, and develop a training program to address each gap.
• Conduct preclose and postclose meetings to identify issues and discuss opportunities for future improvements across the accounting team.

Take action

To improve your organization's close process, take the following actions:

1. Create a formal project   Initiate a project to coordinate the activities required to improve the close process.
2. Assign a project leader   Most often the controller should be in charge of any formal project that affects the close process. Executive sponsorship by the CFO is critical for the project leader to be successful. If the CFO is not behind this effort, don't start it.
3. Assess the gaps   Using the obstacles listed as a guide, rate the accounting team on how well it handles each of the relevant leading practices. Assign ratings on a scale of 1 to 5 or A to F. Poor ratings indicate leading practice gaps that should be addressed.
4. Develop the change plan   Based on the gaps noted above, develop the specific action steps required to implement the leading practices. The change plan should schedule changes based on a mixture of business impact and ease of change.
5. Execute the plan   Technical changes, including the implementation of new software, require a disciplined change control process and close interaction with your information systems team. Technical changes often require changes in the underlying processes or policies that support the change process, adding complexity. The keys to strong execution include strong planning, strong project management, executive sponsorship to resolve issues, involving users in the decision-making, and training on any new processes, systems, tools, or policies.
6. Communication   Communication is the bedrock upon which the above steps rest. Without clear communication of the objectives for making a change, the benefits of changing, the plan for changing, and the progress of the project, the project is susceptible to failure. When making any sort of organizational change, there is no such thing as overcommunicating.

Streamlined close processes add value

Depending on the nature of the changes required, streamlining the close process is hard work, requiring executive commitment, strong project management, and proper execution. Organizations can benefit tremendously by redesigning the close process to support better management reporting and analysis. Unless an organization can close its books within six days of a period close, management misses the valuable opportunity to respond quickly to changes in business conditions. A streamlined close process also increases accounting productivity, allowing the team to focus on more value-added activities.

About the author   BearingPoint provides business consulting, systems integration, and managed services to Global 2000 companies, medium-sized businesses, and government organizations.