Rethinking (and Re-doing) Financial Consolidation and Reporting

New regulations change the economics for financial systems.

By Robert Kugel

VentanaView™

Summary

Consolidation and reporting software is an "old" theme in information technology, but only in the sense that it is has not been a recent headline topic. However, Ventana Research expects this to become more of an issue for finance organizations because Sarbanes-Oxley (SOX) is likely to have a noticeable impact on the cost of running the finance organization. Moreover, companies face accelerated filing requirements by the SEC, which will force many companies to rethink their closing and reporting processes.

The need to meet Sarbanes-Oxley section 404 requirements has preoccupied finance staffs for the past 18 months. We expect that, once their initial compliance work is completed, many will focus on improving their compliance efficiency. We estimate one-half to two-thirds of US public companies will need to address compliance efficiency issues through process changes that reduce control risks and sources of errors, and that simplify execution. For some, this will require changes in how they use their existing consolidation and reporting software, and/or changes to the software itself. Ventana Research recommends that corporate controllers take the lead in establishing an assessment effort. This project's aim will be to identify process change opportunities that cut the cost of compliance and finance operations, and to identify IT requirements necessary to implement or support process change.

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Consolidation and reporting have been in the IT background for many years as most companies deployed systems. Looking out into 2005, Ventana Research expects many companies will re-examine their consolidation and reporting IT systems because of regulatory changes.

Section 404 of the Sarbanes-Oxley Act has transformed what were once informal control processes into formal ones. The overarching aim of this section of the Act is to place greater emphasis on preventative measures to avert fraud instead of relying mainly on audit after the fact. For many public companies, the immediate impact of this change to formal systems will be to increase the cost of managing their finance organizations. This increase, along with the severe consequences for control failure, has transformed the cost/benefit relationship for many elements of finance operations and the IT systems that support them. Finance organizations in public companies have been preoccupied with the need to meet Sarbanes-Oxley section 404 requirements in time for their initial audit under the law. Once this is accomplished, based on our recent research study on Audit and Control issues, we expect one-half to two-thirds of them will need to address compliance efficiency issues. In our judgment, most public companies can benefit from process changes that reduce control risks and sources of errors, and that simplify execution. For some, this will require changes in how they use their existing consolidation and reporting software and/or changes to the software itself. Based on our recent study, we think companies see automating manual systems and eliminating spreadsheets from processes as one of the most productive approaches. For many firms, this will require changes to the closing and consolidation processes and how they use their reporting systems.

Moreover, companies are facing accelerated quarterly and annual report filing requirements by the SEC. Although the deadline was recently extended by a year to allow companies to focus on section 404 issues, complying with these deadlines will force many, if not most, companies to take a fresh look at how they execute their closing and reporting cycles to shorten the process. Cutting the time spent involves a combination of process, management, and IT system changes.

If closing the books as fast as possible were the only goal, companies would, for example, adopt a single chart of accounts (COA), have a single instance of their accounting system, and restructure their corporation to minimize legal entities. For virtually all companies with 1,000 or more employees, these actions are either infeasible or impractical, yet all are likely to benefit from rationalizing all three areas to conform to the economics and requirements of the new regulatory environment.

Assessment

Ventana Research recommends that corporate controllers take the lead in establishing a process and systems assessment effort. This project's aim will be to identify process change opportunities that cut the cost of compliance and finance operations and to identify IT requirements necessary to implement or support process change. We think the payoff from increased compliance efficiency can be substantial. Our study found that, on average, public companies expect ongoing Sarbanes-Oxley compliance will occupy about 10% of their finance organization's time. Reducing that number would have meaningful impact on any company's bottom line. Rationalizing reporting systems is likely to have an additional significant benefit by getting management reports to executives and the field faster.

Robert Kugel is CFA, VP & Research Director - Financial Performance Management at Ventana Research (www.ventanaresearch.com), a research and advisory services firm.