REGARDLESS OF COMPANY SIZE or complexity, all successful fiscal close processes require continuous communication, comprehensive documentation, and a flexible, responsive organization that is focused on people, processes, transactions, reconciliation, and reporting. The degree to which each building block is implemented will vary based on company size, type of industry, availability of resources, and management commitment.

However, omitting one or two of these building blocks may result in some type of failure during a month-end close. The building blocks for the fiscal close are explored in Chapter 3, “The Components of the Fiscal Close.” When executing these building blocks, executing the fiscal close correctly helps achieve the following benefits.

• A reduced cycle time for the fiscal closing process
• A more transparent, better documented process with better insight into the close process
• Finance and accounting executives being more confident in the close
• Well-managed and less-stressed employees
• More time for analytics and the calculation of metrics

The fiscal close process is one of the most fundamental indicators of the efficiency of your fiscal infrastructure, and is the critical foundation that must be in place before your finance and accounting team can even begin to optimize its role as a true consultative business partner and trusted advisor, assisting in achieving strategic goals and creating shareholder value.

Over the last decade, the financial reporting landscape has seen significant change. Finance executives face mounting pressure to increase the accuracy of financial reporting while decreasing turnaround time. Costs are being highly scrutinized as the longest recession in U.S. history continues. Regulatory agencies have introduced a host of new standards and accounting rules changing materiality thresholds and requiring detailed schedules and new disclosures for public filings. To complicate matters, many finance organizations are being asked to do more with less as headcounts are reduced in response to economic pressures.

The current legislation has strict requirements for the timing of preparation and the quality of financial statements. It is especially important for chief financial officers (CFOs) of large companies who receive fiscal information from multiple entities, from different systems, and in incompatible data formats.

Since the adoption of the IFRS throughout the EU and the demand for greater transparency as far as external reporting is concerned following the collapse of corporate giants such as Enron and WorldCom, there is a great need for reliable fiscal information on a real-time basis.

Today's finance organizations face multiple priorities that include the oversight of fiscal transactions, management of enterprise performance, attestation of financial reporting, and timely close and consolidation of fiscal data. As they grapple with these issues, CFOs are always seeking ways to increase the efficiency and timeliness of their fiscal close and compliance processes. However, merely improving the speed of the fiscal close process is not enough.

There is a competing demand for improved fiscal governance and increased transparency and reliability of data. The pace of regulatory change also continues to increase as a result of the current economic challenges as well as ongoing regulatory initiatives such as the mandate of eXtensible Business Reporting Language (XBRL) as the reporting standard format and the likely move to International Financial Reporting Standards (IFRS).

Finance organizations need to proactively manage the challenges of data quality and prepare for new regulatory requirements to avoid creating a “perfect storm” for their fiscal close and consolidation processes. As regulations and requirements become tighter around responsibility accounting, more and more companies are continually reevaluating their closing processes to meet up with their statutory requirements, but also to integrate multiple financial reporting systems requiring a “Fast Close Toolkit.”

HOW THIS TOOLKIT IS ORGANIZED

This toolkit provides the guidance, best practices, tools, templates, and policies to enable a faster fiscal close. The Guide to Toolkit Organization table provides the applicable chapter number for each section.

For easy reference, each best practice, policy, checklist, process narrative, and standard of internal control is numbered throughout this toolkit. Tables for these important references are provided in the following tables:

• Table of Best Practices
• Table of Policies
• Tables of Checklists
• Tables of Process Narratives
• Table of Standards of Internal Control

GUIDE TO TOOLKIT ORGANIZATION

TABLE OF BEST PRACTICES

TABLE OF POLICIES

TABLE OF CHECKLISTS

TABLE OF PROCESS NARRATIVES

TABLE OF STANDARDS OF INTERNAL CONTROL

ACCORDING TO THE Journal of Accountancy, fiscal close systems, processes, people, and their interconnectivity can be complex, but successful improvements to the process can be achieved by introducing some simple building blocks and basics as provided throughout this toolkit.

No matter what the company size, industry, or complexity of systems and process, all successful fiscal close processes require a solid governance and infrastructure, checklists and documentation, standards of internal controls, and continuous communication throughout every phase of the process to ensure accurate and timely fiscal results and reporting.

There are many factors that place the spotlight on the fiscal close process, which is usually led by a team of individuals in the corporate finance and accounting department managed by the corporate controller. The complexity of the process is driven by the nature of the company (private, public, nonprofit, or government subcontractor) and the type of industry or industries the company has responsibility for. Well-defined fiscal closing processes for monthly and quarterly close are foundational to establishing the discipline needed to obtain accurate and timely results throughout the fiscal year.

The fiscal year (FY) is usually the primary accounting year for a company, organization, or government. The fiscal year serves as the organizing basis for economic measurement and financial reporting. The fiscal year also serves as a basis for budgeting and planning. The budget, forecast, and planning process will be discussed later in this toolkit.

Sometimes the organizational structure of the company, the fiscal systems and tools, and the management style can impact the fiscal close. As an additional consideration, a company that has recently been through a merger or acquisition (M&A) activity will have a whole new set of “closing challenges.”

This toolkit will focus on the general best practices for the fiscal close that will enable a “fast close.” With the closing process, I've found that it's critical to do the basics well. In comparing the monthly, quarterly, and annual processes, I've determined that there may be differences in closing schedules, the number of journal entries processed, the types of reporting, the level of scrutiny for external and internal reporting, and the preparation of external communiques for public companies but the need to “close the books” sooner and more efficiently is a universal goal. The ultimate deliverables for the fiscal close process include the following two requirements.

1. Achieving timely, accurate, and consistent data. It's all about the data! Controllers and corporate finance and accounting departments often find themselves in the eye of today's market whirlwinds with both internal and external reporting requirements to fulfill. Timely, accurate, and consistent data is always of critical importance.

   Operational and strategic decisions are dependent on this rapid, precise, and reliable data. This data drives the planning and budget processes of an organization. The digital age has created a class of investors and shareholders who expect immediate access to the data created by current business activities for rapid decision making, to meet regulatory requirements and to complete reporting and review results with metrics and analytics.

2. Adhering to statutory, regulatory, control, and compliance requirements. Statutory, regulatory, control, and compliance requirements add another layer of complexity. Global organizations are required to support reporting with multiple accounting standards, and new legislation requires new systems. Global organizations need to be concerned with the accuracy and regulatory requirements for intercompany accounting processes. Here are two examples and definitions of regulatory requirements that impact the fiscal close. We'll focus on the Sarbanes Oxley Act of 2002 (SOX) and the Foreign Corrupt Practices Act (FCPA). Additional regulatory requirements are provided in the Fast Close Compliance Toolkit located in the addendum of this book.

   The Sarbanes Oxley Act of 2002 (SOX) was designed to enhance the reliability of financial reporting and to improve audit quality. SOX strengthened corporate governance, shifting responsibility for the external auditor relationship away from corporate management to independent audit committees. It instituted whistleblower programs, CEO and CFO certification requirements, and stricter criminal penalties for wrongdoing, including lying to the auditor. These measures and others were geared toward improving the reliability of corporate financial reporting.

   The Foreign Corrupt Practices Act (FCPA) adds a new level of anti-bribery controls to the closing process for global organizations. Under the FCPA's Anti-Bribery Provision, it's unlawful to make a corrupt payment to a foreign official (official, political party, political official, or candidate for political office) for the purpose of obtaining business, retaining business, or directing business to any person. This includes ordering, authorizing, or assisting others to violate or conspire to violate these provisions. This applies not only to a successful corrupt payment—the offer or promise of such payment can also cause violation. Under the Accounting Provision, corporations must make and keep books and records that accurately and fairly reflect the transactions of the corporation. Corporations must devise and maintain an adequate system of internal accounting controls.

IMPROVING THE FISCAL CLOSE

Many chief fiscal officers (CFOs) and controllers face ongoing challenges with the fiscal closing process. In some cases the process is still very manual and spreadsheets are used throughout the process. Many companies can't seem to get a handle on the fiscal closing process and find that a checklist with well-defined roles and responsibilities is needed for every component of this critical and highly visible business process. In some cases, automation is not always the “silver bullet” but gaining a true understanding of the full fiscal closing cycle along with the processes that impact the cycle is a recommended direction.

Several years ago, I managed the fiscal consolidated process at Digital Equipment Corporation (DEC), which is now merged with Hewlett Packard. We faced two very unique challenges that I had the opportunity to address.

1. We had 32 individual general ledgers that were sent to corporate finance every month. Each ledger needed to be individually reconciled before we consolidated the results. Our CFO decided to implement financial management centers which combined multiple ledgers by region. This greatly reduced the time spent collecting data from several locations. The financial management centers were also responsible for reconciling the results in a “mini-corporate consolidation” process, which ensured that clean data was transmitted to corporate finance. Of course, we had some glitches along the away, but the process change in our fiscal architecture took out two days from the fiscal close. This was before the concept of shared service organizations was even fashionable.
2. During the mid-1980s DEC was using a tool called Software International General Ledger (SIGL). We found that our finance team was not using the correct programs to run the corporate work papers, which was a critical step in producing our financial reporting. There were hundreds of incorrect reports that were never purged. My team developed a set of standard reports for the monthly, quarterly, and annual close. All we needed to do was change the reporting period. This process change removed another day from the fiscal close.

I mention these two examples because best practices cannot replace empowerment and a culture of continuous improvement. Lastly, technology and automation are great tools to support the fiscal close, but it's important to ensure that your staff understands how to use them. I suggest the ultimate best practice combines people with automation, and when establishing a goal for the completion of the fiscal closing process, ensures there is enough time to analyze results, metrics, and potential risk. Let's take a look at some best practices.

BEST PRACTICE 1: CONSIDER THE USE OF A SINGLE ERP SYSTEM

Gartner's current definition of ERP in the postmodern era is:

Postmodern ERP is a technology strategy that automates and links administrative and operational business capabilities (such as finance, HR, purchasing, manufacturing and distribution) with appropriate levels of integration that balance the benefits of vendor-delivered integration against business flexibility and agility.ⁱ

The original ERP systems were developed for product-centric companies, which typically have the broadest ERP functional footprint. Product-centric companies traditionally are manufacturing companies and distribution companies.

A single- instance ERP reduces the number of consolidation points and allows the integration of financial transactions across a company. There is no need for uploads to a “system of record” to properly record a transaction.

A single-instance strategy is compelling in that it helps lower cost in the many organizations that struggle with redundant data, high training costs, and lack of insight across disparate systems and processes. A single-instance strategy is related to the desire of a business unit for more autonomy; others are of a more technical nature. There are three factors to consider when evaluating a single instance deployment:

1. Global organizations with legal entities operating in different countries need to comply with local statutory reporting and legal requirements. Trying to comply with these different requirements in one single code base can add system complexity, both in configuration and management as well as user experience.
2. Whenever many users access the same single instance it is critical that access to data and business processes is restricted in a way that can be easily monitored and managed.
3. Although there might be a high degree of commonality across entities, there still needs to be support for industry-specific requirements and specific processes and policies.

BEST PRACTICE 2: EMPLOY CLOUD-BASED COMPUTING

Cloud-based computing (also called software as a service, or SaaS) allows users access to software applications that run on shared computing resources (for example, processing power, memory, and disk storage) via the Internet. These computing resources are maintained in remote data centers dedicated to hosting various applications on multiple platforms.

Cloud ERP is software as a service that allows users to access Enterprise Resource Planning (ERP) software over the Internet. Cloud ERP generally has much lower upfront costs, because computing resources are leased by the month rather than purchased outright and maintained on premises. Cloud ERP also gives companies access to their business-critical applications at any time from any location and is an excellent enabler of a faster close process and supports business continuity and contingency requirements.

INTRODUCTION: THE FISCAL CLOSING process is one of the most fundamental indicators of the efficiency of your fiscal infrastructure, and is the critical foundation that must be in place before your finance and accounting team can even begin to optimize its role as a true consultative business partner and trusted advisor, assisting in achieving strategic goals and creating shareholder value. Getting accurate and timely fiscal information is critical in today's global market because:

1. Financial statements are the ultimate scorecard for a company. A company's financial statements reflect the company's business results and trends—its products, services, and macro-fundamental events.
2. The critical information obtained from fiscal information is used to perform analysis. The absolute numbers in financial statements are of little value for shareholder and investment analysis. These numbers from financial statements must be transformed into meaningful relationships to judge a company's fiscal performance and determine its fiscal health at the current time. The resulting ratios and indicators must be viewed over extended periods to spot trends and predict performance.

If your finance organization is bogged down in a never-ending closing process, they have little time to focus on enhanced reporting or analytics. Visibility to accurate fiscal information and underlying operating metrics are critical to your management team in any economic environment, but particularly in times of uncertainty, where rapid and knowledgeable responses to changing business and market dynamics are imperative.

There are many factors that place the spotlight on the fiscal close process, which is usually led by a team of individuals in the corporate finance and accounting department managed by the corporate controller. The complexity of the process is driven by the nature of the company (private, public, nonprofit [tax-exempt or mission based], or government) and the type of industry or industries the company has responsibility for. Sometimes the organizational structure of the company, the fiscal systems and tools, and the management style can impact the fiscal close process cycle time and the resources needed.

Key Point: The signs that the fiscal close needs attention include:

• The close is completed later than four days after the period end.
• No formal management review of the fiscals is done after every close.
• The driving force behind completing the financial reports is an external reason—bank covenant reporting, tax payments, government reporting, etc.—rather than a sincere belief it is a key management tool.
• The current fiscals are not integral to the company's forecasting system.
• The accounting and finance team is focused on past shortcomings, not getting the most out of the company's future potential.
• Executives are not pushing to get the fiscals as soon as possible each month.
• Every fiscal close event results in chaos, delays, and unexpected results.

The fiscal closing cycle is also referred to as the Record to Report (R2R) process. Record to Report (R2R) forms an important aspect of the finance and accounting process. It provides the necessary insights on the strategic, operational, and fiscal facets, which gives an in-depth idea of an organization's performance. It involves complex processes of gathering, converting, and supplying information to stakeholders who want to know if their expectations have been met.

Regulatory bodies and analysts expect organizations to review their account books in less than a week and release their earnings statements within a month. Industry-specific regulations and the ever-increasing financial reporting has put a huge burden on an organization's reporting process.ⁱ

Key Point: When fewer days are devoted to month-end close activities, more time can be spent providing performing analytics and addressing finance and accounting process improvements.

AN OVERVIEW OF THE FISCAL CLOSE

The accounting process can differ slightly from one business to another based on variances in the chart of accounts, revenue and expense recognition, and cost center breakdown. Despite these differences, the overall monthly closing process is the same. Following the same standard procedures to close the books each month will help ensure consistent and accurate reporting. Here are some basic processes that will add discipline to the fiscal close. These processes will also help to expedite closing processes.

CYCLE TIME TO MONTHLY CLOSE

The following background on the “cycle time to monthly close” comes from APQC's General Accounting Open Standards Benchmarking survey. For this open-ended question, the metric is defined as the cycle time in calendar days between running the trial balance to completing the consolidated financial statements. Cycle time is the total time from the start of the process to process completion, including time spent actually performing the process as well as time spent waiting to move forward.

Of the 2,300 organizations that answered this survey question, the bottom 25% said they need 10 or more calendar days to perform the monthly close process. The top performers, or the top 25%, can wrap up a monthly close in just 4.8 days or less—about half the time of the bottom 25%. At the median are the organizations that need 6.4 calendar days to close out a month's books.ⁱⁱ

For multisite companies with separate reporting entities, finance has to ensure the chart of accounts' naming and numbering conventions are as closely matched as possible. Organizations that strictly adhere to common fiscal definitions need fewer days to complete their monthly consolidated financial statements.

Common data definitions set the business rules for every aspect of the fiscal close and can prevent transactional errors and will help set the foundation for accurate metrics and support consistency through all phases of the fiscal closing process.

INTRODUCTION: ALTHOUGH THERE ARE different reporting requirements and levels of complexity for each fiscal close process, the closing is very similar regardless of industry or company size. Here are some of the common challenges that continue to place the fiscal close in the corporate spotlight. Understanding these key pain points and bottlenecks will help identify the areas of focus when implementing process improvements to achieve a faster close.