Closing Excellence. - An analysis of the financial reporting process of 60 large and medium-sized Danish companies. November 2011

Transcription

1 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies November 2011

2 2 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

3 Contents Companies analysed method and purpose 4 Executive summary 6 Priorities and challenges 3.1 Priorities 3.2 Challenges Reporting cycle times 4.1 Analysis of reporting cycle times 4.2 Reporting to parent company 4.3 International benchmarks on reporting cycle times 4.4 Analysis of reporting cycle times in relation to the companies own focus areas 4.5 Analysis of High and Low performers reporting cycle times Process efficiency 5.1 IT systems 5.2 Centralisation and training 5.3 Standardisation and automation of the reporting process 5.4 Standardised processes and procedures 5.5 Number of FTEs 5.6 Financial entries Ernst & Young s 10 recommendations for improved financial reporting 26 Final remarks 28 Ernst & Young contacts Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske virksomheder 3

4 1 Companies analysed method and purpose With this publication Ernst & Young wishes to contribute to the continued development of the reporting process of Danish companies and, in particular, to provide qualified input as to what focus areas are relevant to companies wishing to improve their financial reporting process. This publication is based on data compiled from 60 large and medium-sized Danish companies. The companies Finance responsibles were asked to fill in a web-based questionnaire in order to uncover trends in the companies financial reporting and the underlying financial processes. The questionnaire included a number of questions related to financial reporting, the underlying financial processes as well as the companies own views on priorities and challenges in improving the financial reporting process. Figure 1.1 Characteristics of the 60 companies analysed Revenue Local business units FTEs < DKK 500 million DKK 500-5,000 million > DKK 5,000 million units 6-30 units > 30 units 18 < 250 FTEs 250-1,000 FTEs > 1,000 FTEs Listed/non-listed Regulatory framework Group structure Listed Non-listed Danish Financial Statements Act IFRS Group Company Ultimate parent 4 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

5 The analysis provides insight into the trends found in the current financial reporting process of a large group of Danish companies, including the respective Finance responsibles perceptions of the challenges involved in improving such a process. So, more than just an empirical analysis, we attempt to convey real life issues facing the companies. For the purpose of the analysis, we have broken down the financial reporting process into the following five steps with particular focus on the reporting time for each step: Local business units Consolidation Internal reporting External reporting Reporting to parent company The companies analysed have reported the number of (additional) working days for the individual process steps. This allows benchmarking of the reporting time for the individual steps as well as the aggregate reporting time for the financial reporting process as a whole. In order to identify comparable underlaying trends in the financial processes, we have grouped the companies into High, Medium and Low performers based on the average total reporting time for the combined process steps Local business units, Consolidation, and Internal Reporting. The High performers are defined as the 12 fastest companies; the Low performers are defined as the 12 slowest companies; and the Medium performers are defined as the remaining 36 companies. Averages are used for all measures indicated for these groups. In so far as we have found it useful for the purpose of the analysis, we have incorporated international benchmarks 1 to compare to the results of the Danish analysis. The 60 respondents do not constitute a representative statistical analysis of the financial reporting process in Danish companies as a whole, as this was not the purpose of the analysis. 1 Ernst & Young cooperates with APQC, an international center providing independent, fact-based analysis with benchmark data from well over 2,300 businesses. Closing Excellence - En analyse af finansielle rapporteringsprocesser 1 Companies analysed i 60 store and og method mellemstore and danske purpose virksomheder of the analysis 5

6 2 Executive summary The need for a more efficient financial reporting process can be driven by the desire for a more cost-efficient process as well as both external and internal stakeholders demand for faster information. But it is also key to note that the role of the finance department is under transformation. Not only must information be communicated at a higher speed it must also increasingly support the business and the decisions made by management. This requires a change in the role of the finance department from merely provider of information to the role of analyst. An efficient and fast reporting process is key to this transformation. The analysis shows great differences among the companies analysed when it comes to reporting time. For instance, the time it takes High performers to prepare annual internal reporting is 12.2 days on average (Figure 4.10), whereas its takes Low performers 36 days on average, i.e. approximately three times as long. An interesting trend in the analysis is that High performers are faster at all process steps (i.e. Local business units, Consolidation and Internal reporting). Good habits are self-reinforcing and flow to all parts of the process. It is characteristic of High performers that they have better integrated IT systems and a highly centralised finance function. Also, the analysis shows that focus on human resource development, standardised processes and procedures as well as automated reporting are important elements in the effort to improve the financial reporting process. The primary challenges facing the companies when they seek to optimise their financial reporting process concern IT systems (particularly integration between systems and modules) and resources/bottlenecks. A common feature of insufficient integration of IT systems and bottlenecks is that they consume resources that could otherwise be allocated to analysis or other forward-looking activities, thereby contributing to value creation and business support in the finance department. In light of the financial reporting process as one of the key elements in the finance department s transformation from production of financial reporting to analysis, we have chosen to summarise 10 recommendations for improved financial reporting: 6 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

7 Ernst & Young s 10 recommendations for improved financial reporting Implement a process for continuous improvement of the financial reporting process Focus on processes and IT systems and particularly on employees and change management Assign ownership of the financial reporting and manage it through a clear division of roles and responsibilities Implement a complete and available finance manual Create a process for efficient resource and skill management Standardise processes, procedures and internal controls Implement a complete reporting calendar and use it actively as a management tool Automate processes and procedures Reduce the risk associated with spreadsheets Perform activities earlier Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske 2 Executive virksomheder summary 7

8 3 Priorities and challenges The role of financial reporting is undergoing significant change. Where focus used to be primarily on the presentation of historical performance, the companies we analysed clearly want the finance department to take a far more proactive role in supporting the business by providing reliable and timely information to management. In other words: focus is shifted from production to analysis. 3.1 Priorities Transforming the finance function from production to analysis is a demanding process especially in times of crisis where focus is on resource consumption and expenses. First, the quality of reporting must be maintained or increased. Second, the transformation towards a more business-oriented finance department places new and higher demands on the company s financial processes, IT systems and employees. Figure 3.1 Transformation of the allocation of resources in the finance department Analysis Analysis Control Control Production Production Across the organisation Optimising the financial reporting process calls for a broader approach focusing on the financial processes, the IT systems and the employees. Ernst & Young 8 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

9 We need to improve processes to release time to focus more on business support. Finance responsible of a company with more than 1,000 employees and annual revenues exceeding DKK 5.0 billion. The challenge facing companies today is that they need to meet increased quantitative and qualitative requirements, while at the same time keeping a sharp focus on expenses. The solution is to optimise and improve the efficiency of the company s financial reporting process so that it can provide more and better information using the same or fewer resources. Figure 3.2 How the companies prioritise improving the financial reporting process This conclusion is further supported by data in the analysis showing that 74% of the respondents consider it important or very important to improve their financial reporting process. 3.2 Challenges It is evident from the responses we have obtained that the companies wish to change the role played by the finance department and that one of the means to this end is process improvements. In the analysis, we investigated the areas that the companies themselves believe pose the largest, specific challenges to an optimisation of the financial reporting process. 26% Figure 3.3 Number of companies that have prioritised the following challenges as 1st, 2nd or 3rd priority 74% Low priority High priority IT systems Resources/bottlenecks Time/process management (deadlines) Cross-functional coordination Skills Use of spreadsheets IFRS/GAAP issues Overview of the process Other Release time for analysis A systematic and structured review of companies financial reporting process can release time from production to be used on analysis instead. Ernst & Young Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore 3 Priorities danske virksomheder and challenges 9

10 3 IT systems are considered the main challenge for all the respondents, irrespective of whether they are categorised as High performers, Medium performers or Low performers. The replies we have received show that the challenges posed by IT systems cover several aspects. Some companies report having difficulty adapting their IT structure to the reporting requirements, whereas other companies have problems integrating different systems. Figure 3.4 The companies priorities relating to an improvement of the financial reporting process IT Systems Cross-functional coordination Resources/ bottlenecks Time/process management (deadlines) Use of spreadsheets High Performers 27% 18% 18% Medium Performers 23% 19% 13% Low Performers 24% 16% 20% First priority Second priority Third priority Many of the challenges facing the respondents span across the above issues. For instance, several respondents consider it a big challenge to obtain the required data from other parts of the organisation, which may be both an organisational and an IT-related issue. Overview and responsibility create a better flow A key element of an efficient financial reporting process is to have a good overview of the process and its components. The process needs to be well-defined so that all parties involved have a clear picture of their respective role and responsibilities, what the output is used for and what deadlines apply to their individual workstream as well as the overall deadline for the entire process. Overview and structure in the process create a better flow and thus, a faster reporting process. Ernst & Young 10 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

11 4 Reporting cycle times Faster reporting may be an objective in itself. The company s management and external stakeholders require prompt and reliable information. But faster reporting is also an indicator of a finance department that is performance-oriented and that, to a wider extent, can allocate resources to forward-looking and business-supporting activities. In this section we will go through the results of the analysis that relate to reporting time. Reporting cycle time is a key parameter for large and mediumsized companies today. Timely, reliable and relevant reporting is essential to support management s decision making. Similarly, external stakeholders require up-to-date and relevant information to support their decision-making process. This focus on timely and reliable information is reflected in a number of the issues, which the respondents mention as reasons for improving the financial reporting process. The 60 companies participating in the survey have answered a series of questions regarding the number of working days they spend on the periodic financial reporting process. The replies reflect big differences. We have broken down the financial reporting process into the steps shown in figure 4.1. In addition, the companies have seperately reported the number of days spent on monthly, quarterly and annual reporting. Figure 4.1 Process steps in the financial reporting process External reporting Local business units Consolidation Internal reporting Reporting to parent company Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore 4 danske Reporting virksomheder cycle times 11

12 4 The data includes a number of trends based on various groupings of the companies. Below we will go through the cycle time of the individual steps of the reporting process and highlight trends depending on size. In addition, we will analyse reporting cycle times for the High performers and point out important correlations between the companies own focus areas and the number of reporting days. Finally, the section will describe those special processes where companies, that are subsidiaries report to parent companies. 4.1 Analysis of reporting cycle times There is great diversity among the 60 companies analysed. Here, the responses for each of the individual process steps are presented showing the fastest 20%, the slowest 20%, as well as the median and the average for the group. Therefore, the shown responses do not take into account the total reporting time from the start to the end of the financial reporting process. The fastest and slowest 20% within each individual process step, therefore, should not be confused with High and Low performers, defined in section 1 above. Figure 4.2 Reporting cycle times within each individual process step and montly, quarterly and annual reporting Local business units Average Fastest 20% Median Slowest 20% Consolidation Internal reporting Average Fastest 20% Median Slowest 20% Average Fastest 20% Median Slowest 20% Time spent on monthly reporting Additional time spent on quarterly reporting Additional time spent on annual reporting External reporting Average Fastest 20% Median Slowest 20% Fast reporting is key Fast, reliable and relevant reporting is key to management s capability of managing the company. In a globalised and digitalised world, high-performing companies are those that manage to quickly adapt to change. Fast and reliable reporting is key to the company s possibility of responding. Ernst & Young 12 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

13 We need to close faster. In 5-7 days. As for the monthly reporting, the fastest 20% of respondents close the local business units within the first 4.2 days of the month, whereas the slowest 20% use 8 days or more. The deviation between the fastest 20% and the slowest 20% is even more significant in relation to the quarterly and annual reporting processes. For the quarterly reporting, the reporting days are 5 for the fastest 20% and 9.6 for the slowest 20%, whereas for the annual reporting they are 6.2 and 19.4 days respectively. When preparing the annual reporting, the slowest 20% companies thus take about three times longer to close the individual business units than the fastest 20%. Finance responsible of a company with more than 1,000 employees and annual revenues between DKK 500 million and 5.0 billion. A similar picture is reflected in the analysis of both the consolidation process and internal and external reporting. In connection with the annual reporting, there are significant differences between the fastest and the slowest businesses analysed. Figure 4.3 Reporting cycle times in days, annual reporting Fastest 20% Median Slowest 20% Average Local business units Consolidation Internal reporting External reporting Many different factors underlie the reason for these great differences, including the size and complexity of the companies. In spite of our expectation that the larger the businesses are, the more complex their financial reporting process will be, the analysis shows that the larger the businesses are, the faster their financial reporting process is. This pattern is repeated if the size indicator used is revenue or number of employees, whether the company is listed, or according to which financial reporting class in the Danish Financial Statements Act the financial statements are prepared. Figure 4.4 Development in number of reporting days based on different size indicators FTEs 35 Number of days Revenue Number of days Listed/non-listed Number of days Reporting classes Number of days < > 1,000 < ,000 > Non-listed Listed B C D DKK Million Danish Financial Statements Act Local business units Consolidation Internal reporting External reporting Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore 4 danske Reporting virksomheder cycle times 13

14 4 So, even if the companies grow and their financial reporting process becomes more complex, an increased need for faster reporting makes the companies accelerate the process. However, in connection with the external reporting framework used, the picture is ambiguous. We expected that companies whose external reporting is prepared in accordance with IFRS would take longer preparing their external reporting than those reporting in accordance with the Danish Financial Statements Act - due to the higher complexity of the IFRS framework (including many and detailed note disclosures). However, the analysis shows but a limited difference in this respect. Figure 4.5 Reporting cycle times in days in connection with the annual reporting Number of days Danish Financial Statements Act IFRS Local business units Consolidation Internal reporting External reporting It takes companies applying IFRS an average of 16.7 days to prepare the external annual report, whereas it takes companies applying the Danish Financial Statements Act 16.3 days i.e. a very small difference. The analysis does not provide any explanation for this, but we are convinced that the reason lies in the fact that companies reporting under IFRS experience more pressure internally as well as externally to have the annual report prepared quickly. For many companies, this implies that they do in fact perform part of the financial reporting process earlier. An example of this is the preparation of an annual report template prior to year-end. 4.2 Reporting to parent company Those companies analysed, that are subsidiaries of a parent company have reported how many days they use to prepare reporting to their parent company. As is the case with the other process steps analysed, the number of days used increases from monthly to quarterly and annual reporting. This increase is expected due to the increased disclosure requirements in connection with quarterly and annual reports in accordance with either IFRS or US GAAP 2. Furthermore, there will often be more focus on going through and analysing the figures before the quarterly and annual reports are completed. In addition, this process step shows a considerable disparity between the fastest 20% and the slowest 20% in line with the other steps in the financial reporting process. 2 IFRS and US GAAP are the two primary sources of reference used by the respondents when reporting to a parent company. Avoid the Q4 effect Many companies could benefit from placing more focus on ensuring the quality of their interim reporting. In practice, we often see that a number of entries that should in fact have been made during the year are made in connection with the year-end closing process. First of all this results in the quality of the interim reporting not being sufficiently high, second of all it creates an unstable development in Q4 figures. Companies placing strong focus on the quality of their interim reporting have a faster year-end closing process partly because more issues have been resolved on an ongoing basis, and partly because the process has become an integral part of the day-to-day operations of the finance department. Ernst & Young 14 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

15 Figure 4.6 Reporting to parent companies, number of days 4.3 International benchmarks on reporting cycle times Number of days Fastest 20% Median Slowest 20% The key figures obtained regarding reporting cycle times are comparable to international benchmarks. The Danish companies analysed show the same trends as the international companies Monthly reporting Quarterly reporting Annual reporting Figure 4.7 Comparison of Danish and international benchmarks on selected reporting cycle times Local business units, monthly reporting International benchmark Danish benchmark Local business units, annual reporting International benchmark Danish benchmark External reporting, annual reporting International benchmark Danish benchmark Internal reporting, annual reporting International benchmark Danish benchmark Number of days Time spent, fastest 20% Additional time spent, median Additional time spent, slowest 20% Efficient management of the entire process The financial reporting process should be owned by the finance department. In practice, this means that the finance department takes ownership of and, thus, manages the entire process. The best results are achieved when companies develop a concrete governance model, which defines roles and responsibilities across functions and departments. Ernst & Young Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore 4 danske Reporting virksomheder cycle times 15

16 4 Concerning local business units, the fastest 20% of Danish companies use more time to complete the process step than the international companies. The slowest 20% of Danish companies are, on the other hand, faster than the corresponding international benchmark. So, the disparity is even greater in the international analysis than in the Danish one. But, the overall picture is that 80% of the Danish companies analysed close Local business units within a period of 8 days for the month and 19.4 days for the year, whereas the 80% fastest international companies use 10 and 23.2 days, respectively. Concerning preparation of the external reporting, the difference between the Danish and the international benchmarks is significant. Here the fastest 20% in the international benchmark use 2 days to complete the external reporting, whereas the Danish companies use 4 days. Similarly, 80% of the international companies complete the annual report in a matter of 14 days, whereas the same process takes 80% of the Danish companies 25 days. It is, however, remarkable that the Danish companies in all categories are faster when it comes to preparing the internal reporting, which sharply contrasts with the picture of the external reporting. 4.4 Analysis of reporting cycle times in relation to the companies own focus areas As described in section 3 above, many respondents have indicated that both IT systems and resource/bottleneck problems are focus areas in connection with the improvement of their financial reporting process. A cross-reference of the reporting cycle times relative to these elements clearly reflects that the companies financial reporting process is affected by whether the focus areas IT systems and resources/bottlenecks are part of the companies prioritised action areas. The analysis indicates that companies considering IT systems and resources/bottlenecks their primary challenges have processes that are considerably affected by weaknesses in these areas. Figure 4.8 Reporting cycle times analysed according to the companies prioritisation of IT Number of days Local business units Consolidation Prioritised Internal reporting Figure 4.9 Reporting cycle times analysed according to the companies prioritisation of resources/bottlenecks Not prioritised External reporting Companies considering resources/bottlenecks a challenge display marginally longer reporting cycle times in Consolidation as well as both Internal reporting and External reporting. This also seems to be a natural consequence of the fact that challenges relating to resources/bottlenecks will affect the process as a whole, as each process step involves complex/specialised issues where core skills are required and, hence, bottlenecks may often become a problem. Particularly the process step External reporting reveals significant differences as to reporting cycle times, as companies needing to focus on resources/bottlenecks in the future use an average of 24.7 days, whereas the other companies use 12.2 days on average Number of days Prioritised Not prioritised Companies considering IT systems a challenge generally have a longer reporting time for both of the elements Local business units and Consolidation. This seems natural, as these process steps typically will be the ones that are the most automated. Whereas the process steps Internal reporting and External reporting do not provide an unambiguous picture of neither faster nor slower reporting due to the prioritisation of IT as a focus area Local business units Consolidation Internal reporting External reporting 16 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

17 4.5 Analysis of High and Low performers reporting cycle times Looking at the High and Low performers, we observe a similar trend as above: a considerable disparity among the 60 companies surveyed. High performers average reporting time for the individual process steps is in all respects shorter than that observed for both Medium and Low performers. It is thus a clear trend that companies that perform one step of the process quickly typically also perform the other process steps quickly. High performers show a total reporting time of 12.2 (Internal reporting) and 20.3 (External reporting) days, whereas Low performers show a reporting time of 40.2 (Internal reporting) and 44.8 (External reporting) days. Figure 4.10 Average annual reporting cycle times, High and Low performers Average High performers Medium performers Low performers Number of days Local business units Consolidation Internal reporting External reporting It should be noted that Medium performers average for External reporting (19.6 days) is affected by certain companies having an unusually long reporting time in this area. If these companies are left out of the average computation, Medium performers reporting time for the External reporting is 12.8 days and, thus, faster than that demonstrated by Low performers. The total average for External reporting decreases from 16.5 to 12.6 days. High performers are companies of varying size and complexity and include both very big Nasdaq OMX C20 companies as well as small listed and privately owned companies. But common to them all is that they score in the upper 20% on most of the process steps. A similar pattern can be observed for Low performers. Consequently, the average values show that High performers as a whole report approximately 2-3 times faster than Low performers. Section 5 that follows includes an analysis of the underlying financial processes for High, Medium and Low performers as well as Ernst & Young s analysis of what characterises High performers. Perform activities earlier Companies wanting to optimise their financial reporting process should identify the activities that can be carried out either prior to - or earlier during - the financial reporting process. For instance, complex accounting issues should be resolved on an ongoing basis so that they do not slow down the process. Ernst & Young Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore 4 danske Reporting virksomheder cycle times 17

18 5 Process efficiency An efficient financial reporting process calls for well-designed processes, well-organised and competent employees and not least IT systems. The trend revealed by the analysis is clear: integration, standardisation, centralisation and skills are key to a more efficient financial reporting process. 5.1 IT systems As described in section 3 above, the respondents generally consider IT systems a great challenge in relation to an optimisation of the financial reporting process. This is backed by the fact that 57% of the respondents do not have fully integrated IT systems in place, which increases the need for reconciliations and other manual control procedures. Therefore, it is a clear trend that companies with the fastest reporting have a better integrated IT structure. This applies both to integration between the ERP system and other systems, integration between the general ledger and sub-ledgers, and adaptation to reporting requirements. Looking at High and Low performers focus areas in these two fields, we see great differences. High performers have fully integrated ERP systems and sub-systems to a much wider extent than Low performers. Also, High performers make more use of automated reconciliation of sub-ledgers. Similarly, Low performers tend to have non-integrated systems and manual data transfer requiring manual and, thus, time-consuming reconciliations. With the same reference to IT systems, the segmented analysis of High and Low performers also shows significant differences as to the degree of automation of the consolidation process. High performers use designated consolidation tools to support the consolidation process to a higher degree, whereas Low performers tend to use the general ledger supported by spreadsheets for consolidation purposes. Automation minimises errors and speeds up the process The financial reporting process is highly affected by the companies IT applications. Insufficient integration between systems usually calls for more time-consuming and manual procedures, increasing the risk of error. An optimisation of the financial reporting process should, as a main rule, focus on minimising the manual elements of the process, including enhanced system integration. Ernst & Young 18 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

19 Our world is becoming too complex. We want to make it more simple and efficient. Finance responsible of a company with more than 1,000 employees and annual revenues exceeding DKK 5.0 billion. Figure 5.1 Degree of system integration, integration between sub-ledgers and the general ledger (GL), and integration in consolidation Systems and integration Fragmented systems with redundant and inconsistent data and extensive Excel-based reporting Fragmented systems with manual steps in place to address data consistency and accuracy Single master data systems within business units; some manual procedures to interface Best of breed automated systems are interfaced to general ledger; workflow approvals for journal entries Integrated ERP platform and common Chart Of Accounts. Business Process Management platform interfaced to GL and operational databases for reporting data Score Sub-ledger interface and reconciliation Sub-ledger data are reformatted and manually entered/uploaded; adjusting entries are required Sub-ledger data are interfaced with GL, but requires manual intervention and manual reconciliation to test data integrity and accuracy Sub-ledger data are transferred to GL electronically; topside adjustments are required Sub-ledger data are electronically transferred to GL with web-enabled interfaces and automatic data capture, few adjustments are needed Sub-ledger data are automatically interfaced and balanced daily Score The consolidation sub-process Close/consolidation process is complex and manual with high degree of adjustments and reconciliations Infrequent feeds to reporting system with spreadsheet or manual consolidation and reporting process Consolidation done primarily in ledger with some Excel reporting Streamlined consolidation using a dedicated consolidation tool Automated consolidation and elimination entries for legal, sta tutory and management books. Workflow application in place to integrate management review in the internal and external reporting process Score High performers Medium performers Low performers It comes as no surprise that the degree of IT integration plays a key role. A high degree of IT integration reduces the need for manual procedures, reconciliations and corrections. Developing a better integrated IT infrastructure may depending on the circumstances be a relatively resource-demanding process, but the analysis shows that a considerable improvement potential may be realised in many companies through such a process. Manage the risk related to spreadsheets Many companies do not pay sufficient attention to mitigating the inherent risk in the use of spreadsheets. In our experience, spreadsheet models very often contain a considerable number of errors and deficiencies. The risk involved may be reduced substantially through a conversion to automated IT reports (e.g. by using the reports in the ERP system or Business Intelligence systems) or, alternatively, in the form of spreadsheet models that have the necessary transparency, consistency and robustness. Ernst & Young Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske 5 Process virksomheder efficiency 19

20 5 5.2 Centralisation and training Another essential factor affecting the speed of companies reporting process is the degree to which the finance department is centralised. The analysis shows that 75% of the respondents have not centralised their financial reporting activities to a high extent. Figure 5.2 Centralisation of the finance department 25% This finding is particularly interesting, as the analysis shows a significant connection between the degree of centralisation and the speed at which the companies analysed report. High performers score significantly higher than the rest of the population in terms of centralisation as, to a higher degree, they centralise their activities at country level. Low performers only make use of centralisation to a very limited extent. 36% 39% Little or none Some High Another result of the analysis is that centralisation e.g. through the establishment of a shared service center - enhances process efficiency, as we see a clear relationship between the degree of centralisation and the reporting time. One reason is that a higher degree of staff specialisation is possible, another is that centralisation allows for more uniform procedures, controls and recording of transactions. Presumably, companies with a high degree of centralisation have implemented a number of optimisation measures as part of the centralisation process. Figure 5.3 Degree of centralisation and outsourcing Outsourcing and centralisation Few transactional activities are outsourced or centralised; no global centralisation or outsourcing Some outsourcing or centralisation, but not country- or world-wide Partial outsourcing or centralisation by country Majority of transactions are centralised by country and recorded consistently across the region All transactional activity is outsourced or handled in shared services center environment Score High performers Medium performers Low performers Standardisation works Centralisation of the finance department often has a positive effect on the financial reporting process, since centralisation requires standardisation in the form of a clear division of roles and uniform procedures and controls. At the same time, economies of scale can be achieved and existing resources may be better utilised due to improved skill levels. Ernst & Young 20 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

21 A similar trend is noticeable in relation to staff development and training. Largely all of the respondents place some or high focus on training and developing their employees. Figure 5.4 Training and development of employees in the finance department However, a segmentation of the analysis by High and Low performers reveals that High performers place considerably more focus on staff training and development than Low performers. Thus, High performers have to a wider extent implemented training and development programmes for employees in the finance department and focus more on rotation programmes and executive programmes for selected employees. Low performers tend to have an ad hoc-based training set-up. 23% 4% 74% Little or none Some High Figure 5.5 Scaling of staff training and development Development and training of finance organisation No development or training available to employees Limited development and ad hoc training Functional training and development programs are in place Rotation programs and leadership training are available for selected individuals FInance staff rotations and leadership programs are in place Score High performers Medium performers Low performers It seems clear that increased centralisation and focus on staff development and training contributes positively to the financial reporting process. This area is particularly interesting, because the respondents as discussed in section 3 above generally have an ambition to shift their focus towards more analysis and business support. Presumably, such a shift in focus will call for an upgrading of the employees skills and business understanding. Optimise resources and skills Companies should systematically evaluate their employees resources and skills. Deviations between existing resources and skills on the one side and the company s needs on the other may be reduced through education, training and re-organisation. Ernst & Young Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske 5 Process virksomheder efficiency 21

22 5 5.3 Standardisation and automation of the reporting process The analysis shows that both the internal and external reporting process involve a high degree of manual work % of the respondents either use a spreadsheet-based solution or have automated their reporting process to a limited extent only. It is evident from the results of the analysis that High performers have automated their internal and external reporting process to a significantly higher degree. This is not surprising, since manual processes are more time-consuming and involve a higher risk of error than automated processes. Also, the analysis shows a clear relationship between the degree of automation and the reporting time. Figure 5.6 Automation of the internal and external reporting process Internal reporting 20% 46% 34% Excel-based Some automatisation High degree of automatisation External reporting 44% 15% 41% Figure Degree of automation in the preparation of internal reports Preparation of internal reporting Internal reporting is prepared in Excel System runs Profit & Loss and Balance Sheet but manual adjustments are required Preparation of the Balance Sheet and Profit & Loss is automated; Cash Flow is manual All internal reporting preparation is automated All internal reporting preparation and distribution is automated Score High performers Medium performers Low performers However, there seems to be room for improvement for the entire population, which could benefit from a more automated financial reporting process both for Internal and External reporting rather than a highly manual set-up mainly based on the use of Excel, Word, etc. It should be noted that the requirements as to electronic filing of financial statements according to the new XBRL reporting standard with the Danish Commerce and Companies Agency will begin to be implemented as from the calendar year for Danish class B entities (small) and class C entities (large and medium-sized). Electronic filing according to a pre-defined framework will inherently entail limitations as to how differently annual reports can be presented. Consequently, the degree of automation of the external reporting must be expected to play an even greater role in future. No date has yet been set for XBRL filing for Danish IFRS-reporting entities 4 (listed companies, etc.). Integrate internal controls and remember all stakeholders The inherent risk relating to manual processes in both internal and external reporting should be reduced by implementing appropriate internal controls. Companies should draw up a detailed plan for the preparation of their reporting. Such a plan should include sufficient internal controls e.g. in the form of approvals, reviews, analyses and number checks and take into account all significant stakeholders involved in the process. Ernst & Young 22 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

23 5.4 Standardised processes and procedures The survey inquires about the respondents assessment of the degree of standardisation of processes and procedures. Around 40% replied that the company s finance department has a high degree of standardisation in place including continous updating of processes and procedures, whereas around 16% have a very low degree of standardisation of processes and procedures and, hence, have processes and procedures that tend to be both inconsistent and undocumented. Figure 5.8 Standardisation, updating and documentation of processes and procedures for the entire population 40% 16% Standardised processes and procedures appear to have a significant impact on the companies reporting time as well. Thus, High performers stand out significantly, revealing a much higher degree of standardisation, documentation, updating and monitoring. 44% No standardisation/ undocumented Some standardisation and documentation High degree of standardisation and documentation Figure 5.9 Degree of standardisation, updating and documentation of processes and procedures Consistency and documentation of policies, processes and procedures Policies, processes and procedures are inconsistent and undocumented Policies, processes and procedures are documented but not consistently applied in practice Standardised policies, processes and procedures are documented and adhered to Policies, processes and procedures are standardised, documented, adhered to and regularly monitored Policies, processes and procedures are standardised, documented, adhered to, enforced by the system and monitored by a Center Of Excellence Score High performers Medium performers Low performers Another interesting conclusion is that fewer than 25% of the respondents have implemented a complete reporting calendar, including both start and end times for the individual tasks and a description of the mutual dependency of the tasks. 3 As for reporting class B entities this applies to all annual reports with a balance sheet date which is 31 January 2012 or later, and it has been announced that the deadline applicable to reporting class C entities will not lie before annual reports with a balance sheet date which is 31 July Regarding IFRS-reporting entities, the Danish Commerce and Companies Agency has announced that the electronic filing requirement will not take effect for annual reports with a balance sheet date which is before 31 August 2013, which for most companies will, in practice, be the calendar year A reporting calendar is an indispensable management tool The vast majority of companies can benefit from implementing a complete reporting calendar for the purposes of both planning, execution and management of the financial reporting process. Such a calendar should contain both start and end times, the resources required for the activities and the mutual dependencies of the tasks. Overview of the financial reporting process reduces inefficiency, enhances cooperation and increases the reporting flow. Ernst & Young Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske 5 Process virksomheder efficiency 23

24 5 Both a higher degree of automation and the use and documentation of standardised processes and procedures are important components in the companies desire to have a more efficient reporting process. The analysis shows that automation reduces reporting cycle time. There is also no doubt that updated, well-documented and automated procedures reduce the dependency on key employees and ensure a higher reporting quality. 5.5 Number of FTEs The need for employees who are involved in the financial reporting process varies a lot and is dependent on the complexity of the company and the scope of internal and external reporting. According to the analysis, the 20% of the respondents that have the lowest relative number of employees involved in the financial reporting process have three employees per one billion DKK of revenue. The 20% of the companies which have the highest relative number of employees involved in the financial reporting process have 19 employees per one billion DKK of revenue. The median Group has an average of eight employees. Figure 5.10 shows the disparity in the relative number of employees directly involved in the financial reporting process. Figure 5.10 Number of FTEs involved in the financial reporting process per one billion DKK of revenue 25 Number of FTEs Fastest 20% Median Slowest 20% Figure 5.11 shows the average number of employees involved in the financial reporting process broken down into High, Medium and Low performers. The difference in reporting time cannot be explained by a higher number of employees being available to perform the tasks. On the contrary, High performers have significantly fewer employees per one billion DKK of revenue than Low performers. Figure 5.11 Number of FTEs involved in the preparation of both internal and external reporting per one billion DKK of revenue 30 Number of FTEs High performers Medium performers Low performers 24 Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies

25 5.6 Financial entries Figure 5.13 Percentage of entries which were first time error-free First, it should be noted that the response rate in this part of the survey is significantly lower than in the rest of the survey. However, since the results reveal the same trends as in the international benchmarks, we believe that the trend displayed is based on adequate data. 100% 95% 90% International benchmark DK The trend revealed by the analysis is that there is a big difference between both the share of manual entries and the share of errors corrected among the companies analysed. High performers have considerably fewer manual entries, and their share of first time error-free entries is higher than the rest of the population. 85% 80% 75% High performers Medium performers Low performers Figure 5.12 Percentage of manual entries 80% International benchmark DK 70% 60% 50% 40% 30% 20% 10% 0% High performers Medium performers Low performers The number of manual entries often greatly impacts a company s reporting time since they are time- and resource-consuming. Furthermore, they considerably increase the risk of error, which results in a need for extra controls. Likewise, the number of error corrections can be essential to the efficiency of the company s financial reporting process. Often, following up on and correcting errors consumes considerable resources, which delays the entire process and makes the financial reporting process less efficient. Minimise manual entries and error corrections Many companies can increase both the quality and the speed of the financial reporting process by reducing the volume of manual entries and error corrections. Handling of master data and correct recording of transactions at the first point of contact reduces resource requirements considerably. This should be done by ensuring that the underlying processes e.g. recording of purchase orders have been appropriately organised so that they meet the company s reporting requirements and support solid, preventive and detecting controls, which ensure the quality of the reporting. Ernst & Young Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske 5 Process virksomheder efficiency 25