Financial Reporting and Data Transparency Challenges
by Donald Baribeau, May 2010
Financial executives are under increasing pressure to make quick and accurate business decisions. The data required to support business assessment is often very difficult to obtain at all levels of the organization. Further complicating matters are the differing reporting requirements of external statutory reporting versus internal management reporting. How a company deals with this challenge can be the difference between profit and loss.
Current Reporting Challenges Finance departments are facing extreme pressure to improve the financial close and reporting process. Externally, market and regulatory bodies have accelerated reporting deadlines and expanded disclosure requirements. Internally, companies are faced with the need to improve their understanding of the business, and financial reporting is the essential delivery mechanism for this. However, financial reporting is not keeping up with the challenge at many companies. According to a 2009 KPMG study, when asked which finance activities and processes were they most likely to improve over the next two years, 61% of CFOs answered financial reporting.
One challenge common to many companies is the lack of data transparency, which is the ability to drill down and understand a number’s composition. Many organizations have multiple general ledgers and source systems that are comprised of different vendor technologies, and thus have limited integration. This leads to manually intensive reporting-related processes that take an extended amount of time to execute. The problem becomes more pronounced when the finance organization attempts to create reporting-by-business segments, or customer and product profitability reports.
Finance professionals are on the whole very methodical about and successful at leveraging available tools. It is no wonder that Microsoft Excel is so pervasive throughout most companies. Whether it’s for an executive analysis request, a requirement to comply with a new statutory requirement, or a need to assemble source system data to form a journal entry, Excel becomes the answer. If you think about how often this occurs daily in a typical company, you start to realize the magnitude of key company data that resides in offline systems.
Assessing the Reporting Environment Financial and management reporting at most companies is complex. Understandably, it is difficult to sort out all the different reporting challenges. In order to do so, companies can take three steps:
1. Identify the challenges and place them into logical groupings
2. Identify the capabilities required to resolve the challenge
3. Develop a plan to implement the capabilities
Not making it all the way through this three-step process, or only addressing a smaller group of the identified challenges, is often why most changes to reporting have a limited impact on the organization. By addressing only one or two of the challenges, companies can solve the immediate problem, but in the end the solutions may not be integrated well with the upstream and downstream reporting needs. Often the quick answer becomes Excel, and the overall issue of transparency and control has only incrementally improved. For example, the chart of accounts (COA) is defined to ensure statutory and tax reporting, and the European executive vice president requires a product family’s operating profit for the region. This often requires analysis of the detail from multiple sub-ledgers and manual accumulation in Excel to report the operating profit. The report is manual, offline from the core enterprise resource planning system, with limited access and without the transparency an organization needs for real-time decision making.
Performing the assessment process correctly involves a time and resource commitment from the financial organization. Often, companies seek third-party assistance. However, this only partially mitigates the need for resource and time commitment. Here is an overview of a best-practice assessment approach:
Scope Definition — Decide which areas are in, and which are not.
Map the Current Process - Identify the reporting challenges.
Identify Capabilities - Decide on the capabilities required to meet the challenges.
Prioritize the Gaps and Value — What is the most important capability, and what is its benefit?