Last week, our blog series featured steps to crafting an effective financial system process. This week we change gears and point out a few areas of concern to be aware of in the process.
Financial processes are not static. Changes to a firm’s business model (management, organizational structure, acquisitions, products, markets, countries of operation, etc.), regulatory environment, or technology platforms can necessitate workarounds in order to meet reporting deadlines. Over time, these manual interventions compound, resulting in a fractured financial process.
Viewing and documenting the end-to-end financial process with fresh, unbiased eyes is a prudent approach to identifying opportunities to drive towards the goal of a removing the manual touchpoints and streamlining the operation.
Extracting and analyzing all manual and uploaded postclosing entries for a recent accounting period from the general ledger, along with their sources, will reveal areas of focus. By reviewing the journals in each batch, the timing dependencies of the journals can be determined. With the predecessor for each batch known, a Gantt or PERT chart can be constructed to highlight critical path impact of each segment of the post-closing entries.
Automated journal feeds should be reviewed to ensure they are being processed at the earliest possible time in the closing cycle (e.g. expense/overhead allocations as soon as P&L closed).
Special attention should be paid to the time and effort required to prepare regulatory reports. As reporting requirements evolve, rather than change the mapping structures that create the regulatory lines, back-end processes are created to slice, dice, and reclassify balances to adhere to the revised reporting classifications. These workarounds are generally due to missing data attributes or the reluctance to change reporting structures for fear of impacting other reports or users. The general ledger trial balance for a recent accounting period can be reviewed to indicate those source systems that have strayed from providing the data attributes required to map the balances to the requisite reporting lines systemically.
Special consideration needs to be taken where a firm, through acquisitions or otherwise, has multiple general ledger systems in use. Where practical, a single ledger environment, with its uniform processes and chart-of accounts will result in a more efficient and streamlined financial process. There is an inherent advantage in having all operating units speaking the same accounting language.
Where a single ledger profile is not feasible, the subsidiary ledgers may be considered sub-ledgers and mapped to the core G/L, or alternately left independent, simply feeding an external consolidation system (e.g., Hyperion). The decision as to which architectural path to follow should be dictated by the firm’s desired financial consolidation and reporting process.
When a firm needs to consolidate and report against multiple accounting standards (e.g., GAAP, IFRS), adjusting entries should be indicated as such via coding nomenclature, such that the downstream consolidation and reporting applications can include/exclude the journal balances as dictated by the specific accounting rules of each standard.
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