Driving efficiencies in the new month end close - vena solutions

Driving Efficiencies in the New Month-End Close

Month-End Close Series

The month-end close process has evolved through many iterations and continues to change. Long gone is the traditional, slow close where the goal was to generate accurate numbers. Finance organizations came under pressure to speed up the process, and while software vendors focused on automating the traditional close, life for Finance got complicated.

The month-end close has become more complex and high risk since 2000 and legacy Finance applications have not generally been able to adapt to the changes. Companies were forced to change how they measure their success and faced increased regulatory scrutiny, but still needed to issue full-scale, fully-compliant, timely financial statements every month. After decades of attention and work on automating the month-end close, and adapting software systems to handle time and regulatory pressures, there is still substantial room for improvement.

Today, many companies endure a “dysfunctional” close – a costly, high-risk process that is repeated every month. This paper examines why the month-end close has become so difficult, and four options that companies can choose from to dramatically improve efficiency and reduce risk.

Executive Summary

© 2014 Vena Solutions Canada, Inc. 1

A high-quality, well-managed close process is important for building investor and marketplace confidence in the company.

There is evidence that the month-end close process has room for considerable improvement at many companies. Time spent closing is a measure of dysfunction in the overall process. The 2013 BPM Partners’ Pulse of Performance Management Survey found that over 44% of respondents needed two weeks or longer each month to carry out the close.6

• 18.4%took1to3daysformonth-endclose• 37.4%took1week• 32.6%needed2weeks• 11.5%needed3weeksorlonger

The benefits of a smooth month-end close are not trivial. The Hackett Groupreportsthat“world-classcompaniesspend45%less”ontheircloseand reporting efforts than other companies, which on average, saves $5.5millionper$1billioninrevenue.”3 Otherresearchfoundthata25%reduction in close management process costs, and an up to 20% reduction in reconciliation management costs are possible. Continuity Control published a study in late 2013 demonstrating that, for banks, the cost of compliance has soared past $43,000 per company per quarter.4

In a BDO poll of board members of public companies, 69% of respondents indicated that the biggest risk to their business was regulatory and compliance overload. The second most reported business risk was cyberbreach (13%), followed by fraud (9%).5

The 2013 BPM Partners survey focused on the reasons companies are trapped with a cumbersome closing process:

Spreadsheet spaghettiNineteen percent of respondents to the BPM survey said that their current solution is based on spreadsheets - dozens or hundreds of spreadsheets that were created over time, with no cohesive plan guiding their interaction and design, and little or no governance mechanisms around them.

“The Bank’s goal is to have zero errors.”

-Charles O Halliday, Jr, Board Chairman, Bank of America,

commenting on a $4 billion reporting error, which led the

Federal Reserve to force Bank of America to cancel its dividend and

share buyback plans 2

Challenges of the Month-End Close

1


Obsolete legacy applicationOne major challenge for companies is that their legacy application no longer meets their needs. For example, it may be pre-Sarbanes Oxley and lacks a facility for compliance measures, such as data collection for footnote disclosure.

Barriers to managing multiple currencies The company may have grown or is now in a multi-currency situation and has an application that does not extend without considerable implementation costs to accommodate local currencies and currency translation. The legacy application may require a separate currency translation module, which cannot be upgraded without a round of integration.

Intercompany eliminationsMany companies find themselves saddled with days of manual, error-prone, intercompany elimination work because their current application cannot automate this work, or cannot be customized to match the company’s reconciliation challenges without major time and expense commitment.

Multiple systems that are difficult to integrateSome organizations have multiple finance-related systems and must manually collect and aggregate their output to provide reporting for internal and/or external purposes.

Workflow not incorporated into the software The current system used for a month-end close solution may have been developed before today’s workflow was needed - before today’s regulations existed - and has no ability, or limited ability, to expand to meet these new requirements. This forces Finance to manually sequence tasks to support the consolidation and ancillary processes.

Challenges of the Month-End Close


“The benefits of a smart month end

close are not trivial.”

-Pat Calitri, Director, Financial Close and Consolidations Solutions, Vena

Solutions

Any Finance director or CFO can confirm that the month-end close has gone from absolute tedium to something far more stressful - a Pandora’s Box of liability under time pressure. For many, there is constant concern about errors, possible restatements, and even the possibility of major hits to stock market value and career crashes.

The month-end close is a process that many describe today as inefficient, error-prone, risky, time-consuming and costly.

Software systems designed in the 1990s are difficult to retrofit for newer, mandated close processes and requirements. To appreciate the demands put on Finance groups and the software they use to carry out the month-end close, this document briefly reviews the events that have kept corporate Finance in the global hot seat since 2000.

Changes in month-end close since 2000Since the turn of the millennium, financial closes and reporting have been impacted by a series of financial crises, scandals, and corresponding regulatory responses, as well as evolving reporting standards.

What were the trigger events?

“When it comes to financial reporting and

the closing process, we find that our biggest

challenge isn’t getting our GAAP financials

and SEC reporting in good shape under tight

deadlines; rather, it’s the ever-evolving managerial

reporting needs which are more difficult

to deliver when the organization is complex.”

-Marcelo Fischer, CFO, IDT Telecom 7

How the Month-End Close Became Dysfunctional


The dot-com bubble pops, creating a massive fall in equity markets from over-speculation in tech stocks.

Enron bankruptcy and scandal.

A junk bond crisis.

The September 11 attacks and a nearly immediate string of large bankruptcies attributed – rightly or wrongly – to the attacks.

Worldcom bankruptcy and scandal.

US real estate crisis.

The collapse of large international banks and financial institutions. Panic in equity markets.

Bear Stearns fails.

Subprime and credit problems explode.

2000 2001 2007

Lehman Brothers goes bankrupt

The beginning of a long credit crunch and a frozen interbank market.

2002 2008

Regulatory whiplash As a consequence of the scandals and near-panic seen in many countries, new regulations and legislation were enacted to force greater accuracy in financial reporting for public companies. The hope was to protect the public and financial markets from malfeasance and to avoid an epidemic of recklessness that one would not expect from highly-educated, highly-trained, well-compensated executives. Some of these changes were coming in any case, but the startling degree of wreckage in the overall economy and the collapse of marquee “fortress” businesses motivated policymakers to accelerate changes and toughen regulations.


How the Month-End Close Became Dysfuntional

The Sarbanes-Oxley Act of 2002 is enacted and mandatory for ALL organizations, large and small.

The Public Company Accounting Oversight Board (PCAOB), a non-profit corporation, is established by Congress to oversee the audits of public companies, as well as audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws. Auditors of U.S. public companies become subject to external and independent oversight for the first time.

Europe: The conversion from national GAAP reporting to IFRS is mandated by the Council of the European Union for all member states.

Basel II is issued. It is an international standard for regulators to control how much capital banks put aside to guard against financial and operational risks.

Many companies in Europe begin their conversion to IFRS.

The SEC approves releases for new rules that require operating companies to report financial information, and impose requirements on mutual funds to report risk/return summary information in XBRL.

Proposed rulemaking to implement the Basel II risk-based capital framework in the United States.

Basel III global, voluntary regulatory standard on bank capital adequacy, stress testing and market-liquidity risk.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is passed; it

is a compendium of federal regulations.

US Federal Reserve issues joint notice of proposed rulemaking to amend the capital adequacy framework of Basel II to be consistent with Dodd-Frank.

SEC statement on convergence between International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) standards.

Canada : Publicly accountable profit-oriented enterprises required to use IFRS in interim, and annual financial statements on or after January 1, 2011.

In December 2011, the The U.S. Federal Reserve announces that it will implement substantially all of the Basel III rules; they are to regulate banks and all institutions with more than US$50 billion in assets.

US - Final rules implementing the Basel III international capital accord are adopted.

Volcker Rule passes. It forbids banks from engaging in proprietary trading and puts limits on their investments in hedge and private equity funds.

2002

2013

2004

2005

2008

2009

2010

2011

The impact on the month-end closeHere are more details on the aforementioned rules and regulations:

Sarbanes-Oxley: Led to increased oversight and transparency to ensure that public companies validate their oversight of data.

The Public Company Accounting Oversight Board (PCAOB): The instrument of external regulation of the auditing industry, which previously “regulated itself.” In simple terms, financial results and audits now require more accompanying justification and explanation because they are subject to tighter scrutiny.

International Financial Reporting Standards (IFRS) Transition: Requires changes to GL and consolidation systems to support the reporting in IFRS standards compared to the local GAAP.

eXtensible Business Reporting Language (XBRL): Requires tagging of financial data. Full compliance is required in all cases on October 31, 2014.

Basel I, II, III: New disclosure and oversight rules about filing requirements and added tagging.

Dodd-Frank Act: Promotes the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other protection purposes.


“The only surprise about BofA’s error

is that it doesn’t happen more

often.”.

-Stephen Gandel, Senior Editor, CNN Fortune, on how Bank of America lost

billions and forgot to tell investors April 29, 2014 8


High-profile mistakes illustrate the pitfalls and consequences of a dysfunctional month-end closeIf anyone doubts that Finance departments are highly stressed, the following Citigroup case should give them pause. In March 2014, Citigroupsharesdropped5.4%inoneday,aftertheFederalReserverejected the plans of Citigroup and four other banks to raise dividend payments and increase stock buybacks. The Fed said the management practices or capital cushions of these banks were not robust enough to withstand a severe economic downturn.

It was the second time in three years that Citigroup failed the stress test. This incident, among others, have motivated Finance executives and CEOs to avoid painful, public blows - not to mention something like a roughly 10% stock price slide that subtracted over $14 billion from Citigroup’s market value.

Similarly, Goldman Sachs and Bank of America also initially fell short of the minimum capital requirements, and were forced to reduce their planned dividend payouts and share buybacks.

The examples above may seem anecdotal and unusual, but for each highly public multi-billion-dollar reporting error, there are many companies that have struggled to identify and correct errors and inadequate disclosures in their month-end closes and reports.

“The advantages of a five-day close are not

so much the speed but reduction of risk,

more security, and less error.”

-Tony Ho, Finance Director, Tesco Property, China 9



The good, bad-mixed-with-good, and the downright uglyEvery corporate Finance department must complete a variation of the following phases, covering the required steps and disclosure, regardless of whether their software infrastructure helps or gets in the way.

Three Month-End Close Scenarios

Below are three highly contrasted month-end closing scenarios:

• The Negative Scenario: A difficult spreadsheet-based close, but certainly not a worst-case scenario

• The Typical Scenario: A more common close hindered by inefficiencies and lack of cohesive automation

• The Efficient Scenario: An efficient close with a strong level of software support for the newer requirements and processes.

The negative scenario: Excel®- based and almost completely manualMany companies, including mid-sized and large organizations, still conduct their month-end close using a completely manual system – they use Excel alone, and all their controls, audits, and compliance activities are based on manual intervention. This also means that the right outcomes are dependent on users remembering to do things. Manual copy-and-paste of data and information is the prevailing consolidation method, along with manual aggregation for the various reporting requirements.


The frantic dash to close the books quickly puts significant pressure on already over-taxed Finance professionals because data must be consolidated from a range of systems, then reconciled and adjusted in order to produce the array of financial statements needed for management, investors, regulators, and other stakeholders.

The process in this first scenario is inherently risky; there is a high probability of errors due to tight deadlines, unstructured interaction of multiple employees, and disparate sources of data.

The common element of this very inefficient and time-consuming process may also be the light at the end of the tunnel: almost all the data collected, shared and reported upon is frequently found in spreadsheets – more specifically, in Excel spreadsheets. Some newer solutions can easily adapt to this situation, with fast implementation, easy customization, and enterprise-grade data governance that encompass existing spreadsheet models used in close and reporting processes.

The typical scenario: struggling with inefficiencies

In this common scenario, where “bad is mixed with good,” the organization already has automated certain steps of the month-end close, often via a high-maintenance client/server application. The automation that currently exists in many organizations is delivered by point solutions that address items such as financial consolidation. All the remaining month-end close tasks are carried out manually. Sharing of data between the various solutions is an ongoing integration and governance challenge, which is usually accomplished by manual reconciliations and intervention.

In this scenario, the ability to incorporate new financial regulations into the month-end process is limited. The more rigid and inflexible the application, the more likely it is that support processes like controls, data collection, disclosures, and adjustments will take place across ungoverned spreadsheets, email and word documents. The old fallback of printing and manually approving many of these tasks using month-end binders is usually a poor substitute for the automation of these tasks.

“The only surprise about BofA’s error is that it doesn’t happen

more often.”

How Bank of America lost billions and forgot to tell regulators.

Stephen Gandel, Senior Editor, CNN Fortune, April 29, 2014



Adding a software solution that can automate all of these support functions, in a single platform, removes the need to find - and then integrate - additional point solutions for each process. Turning to a unified solution to complement existing solutions will ease the task of integration and makes for easier and smoother collaboration.

The efficient scenario: automated, integrated, and adaptable to new regulationsA minority of companies - we estimate under 20% - have achieved a highly automated month-end close, with support processes and seamless integration across the functional steps. This group often completes the entire close in one to three days, according to BPM Partners.

This level of speed and efficiency generally occurs with a unified solution that offers a high degree of flexibility and configurability, while fulfilling data governance requirements.



Month-end close best practices are intended to shorten the closing cycle and reduce risk. They include a mixture of process, technology, and communication measures.

To enable companies to achieve an efficient close, software should:

• Standardize formats and processes, even if different financial reporting systems are still in use. This will help reduce the level of manual intervention needed for reconciliation, while allowing the local organization to meet local statutory requirements.

• Leverage current processes where possible to reduce training and increase adoption.

• Protect spreadsheets used in the month-end close with data governance safeguards.

• Automate data collection wherever possible.

• Adapt workflow to handle current requirements: controls signoff, accounting tasks that drive journal adjustments, data collection, and disclosures signoff, among others.

• Establish a common language for reporting across the enterprise to achieve greater control over data and data quality.

• Automate closing activities and standardize financial systems. This provides substantial advantages for implementing a high-quality close.

• Handle the Last Mile and post-close effectively by enabling companies to maintain communication with auditors and regulators to reduce the time spent resolving unanticipated issues or unclear interpretations of reporting requirements.

• Multinational companies can benefit by actively monitoring regulatory discussions so that they can be prepared to respond with the least amount of disruption to data collection, preparation, and reporting processes.

Best Practices: How to Achieve the Efficient Close


Many of the legacy solutions used to handle month-end closes were conceived and built before today’s regulatory changes were in place. Modifying or retrofitting these systems would be very expensive and time consuming.

Because customizing or updating older tools may not be enough to handle these requirements, companies should look at new, more agile solutions that can easily be adapted to handle the broad range of processes involved in month-end close and compliance reporting. Compared to upgrading current legacy applications, this approach may offer significant advantages in terms of cost, effort, and risk mitigation.

Should you replace, customize (at high cost), extend (at high cost), or complement? Many companies find themselves in the second scenario mentioned above – they are typically saddled with major inefficiencies with an existing client/server-based point solution application. Usually, partially integrated add-on modules are available, and can automate more steps in the close process—at a cost.

In this situation, there are four high-level options for companies to weigh:

1. Abandon and completely replace the legacy application.2. Retrofit and customize the legacy application.3. Acquire additional modules or additional point solutions from the

various vendors to obtain additional functionality. 4. Complement the legacy application with a next generation system to

handle the newer mandated processes.

Let’s briefly mention some considerations:

Most often, with Scenario 2 (“typical inefficiency”), the Finance department executes numerous tasks manually, as it strives to build one version of the truth. Manual copy and paste between the various systems, along with reconciliation work, eat up many hours. Even if the same vendor provides point solutions for some newer requirements, these are

Technology: Legacy Heavweights vs. Next Generation Solutions


often separate application modules that were acquired in mergers, so the validations between the modules are still manual in nature. In other words, the extension modules are not unified, and there’s an integration problem despite remaining with one vendor.

Option Cost RiskTime to Project Completion

Future Adaptability

Replace and migrate entirely to a light-footprint, unified application

Moderate to high Moderate to High 6 months to numerous years, depending on the solution selected

Depends on solution selected

Customize legacy application

Moderate to high Low, allows for incremental testing

6 months to 12 months for each customization or module addition

Low

License more modules for newer functions

Moderate to high Low, allows for incremental testing

6 months to 12 months

Low to moderate

Complement existing application with light-footprint unified solution

Low to moderate Low, allows for incremental steps

6 to 12 weeks High


Technology: Legacy Heavyweights vs. Next Generation Solutions

Month-end close workflow Any Finance department should look carefully at how much month-end close work can be automated and built into a solution. In most cases, the answerwillbeconsistentwiththe80/20rule:80%of workshouldberipe for automation while the remaining 20% should have the possibility of being automated - albeit at a much higher cost.

A detailed analysis of your workflow is critical for planning the customization or extension of a new or existing system. It will provide insight into the complexity and amount of manual work that corporate accountants must face every month. An error in one of these steps, or in a sub-step, can throw final results off. Large errors can slip into later processes if there is no automation.

The Citigroup and Bank of America examples are just recent illustrations. Humans become fatigued and distracted, and experience a certain blindness to improbable numbers.

Legacy applications are often difficult and expensive to customize. This is where a relatively lightweight system, built around Excel, but with enterprise-grade safeguards and workflow, can reduce implementation time and costs, while retaining application flexibility.

“I live it every day.”

-Brian Moynihan, CEO, Bank of America,

Addressing shareholders on May 6, 2014 about a $4 billion reporting error which led the Fed to force Bank of America to cancel its dividend and share buyback

plans

“The only surprise about BofA’s error is that it doesn’t happen

more often.”

How Bank of America lost billions and forgot to tell regulators.

Stephen Gandel, Senior Editor, CNN Fortune, April 29, 2014

The Manual, Excel-Based Close: How Much Can Be Automated?


How the Month-end Close became Dysfunctional

The month-end close has changed significantly since 2000, becoming more difficult and high-risk for Finance. Legacy solutions are not easily retrofitted or customized for added processes.

Newer, lighter footprint solutions can now enable a better closing process, however. It can be much easier, faster, less expensive, and less risky to complement legacy point solution close tools with a new, agile month-end solution, than to retrofit the legacy application.

The gap in risk/outcome/cost from the manual and inefficient Close, to typical inefficiency to efficient scenario is dramatic. Finance groups can easily compare their month-end close to industry norms and the best-case scenario presented here to calculate their own potential gain. The results of many studies, including the Hackket Group study mentioned earlier, support this conclusion. There is ample motivation for Finance to investigate the options available for each month-end close situation.

Conclusions


About the Author - Patrizio Calitri

As Director, Financial Close & Consolidations Solutions, Patrizio (Pat) Calitri, CPA, CA, is responsible for the overall business leadership of Vena’s Financial Close and Consolidations solutions. Pat’s previous roles include corporate controller at Clarity Systems, Retail Controller and Corporate Controller at Grand & Toy (OfficeMax’s Canadian subsidiary) and Audit Manager at Ernst & Young LLP. During his nine-year tenure with IBM (Clarity), Pat held a variety of positions, including Project Implementation Lead, Client Services Manager and Director of Financial Close Management. Pat’s position prior to joining Vena was Business Unit Executive, WorldWide Product Marketing, IBM Analytics, where Pat managed product marketing for IBM’s Disclosure Management and Financial Close solutions. In this role, Pat was responsible for defining and implementing the global market strategy for IBM solutions that automate all areas of the financial close process. Pat holds a Bachelor of Mathematics (Honours Chartered Accountancy Option / Information Systems – Co-operative Programs) from the University of Waterloo.

Vena Solutions delivers the most flexible performance management solution available for budgeting, forecasting, planning, reporting, analytics, and other mission-critical finance and accounting processes to large and mid-market companies around the world. Vena’s unified web-based software platform embraces all the power and flexibility of Microsoft Excel, yet provides powerful workflow management, control and reporting capabilities. This unique approach is complemented by a dedicated consulting, advisory and training team. The result is fast time to benefit for our clients, at a lower cost of ownership of a solution that is easily managed by our clients. Vena’s rapid growth is due to our success in improving our clients’ business processes to increase efficiency, performance and drive true business value.

www.venasolutions.com

About Vena Solutions


CFOs’ Insights into the Benefits of a High-Quality Close, CFO Research Services, 2013. http://blogs.marketwatch.com/thetell/2014/05/07/bank-of-america-ceo-moynihan-says-4-billion-error-was-disappointing/ How IT Executives Can Help Speed Up Financial Closings, CIO Magazine, March 15, 2007 Source 1: https://d2b75q7u5jtkag.cloudfront.net/2013/Q3/BCI_Table.jpg Source 2: http://www.insidecounsel.com/2013/10/14/surveys-show-regulation-compliance-overwhelming, Inside Counsel, By Rich Steeves October 14, 2013. Source: BDO Board Survey, http://www.bdo.com/download/2854 BPM Partners, Inc. www.bpmpartners.com Business Performance Management Pulse Survey, 2013

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Source: CFOs’ Insights into the Benefits of a High-Quality Close, CFO Research Services, 2013. 9

Source: CFOs’ Insights into the Benefits of a High-Quality Close, CFO Research Services http://finance.fortune.cnn.com/2014/04/29/bank-of-america-error/

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Economy & Finance

Driving efficiencies in the new month end close - vena solutions