For many companies, the financial close process resides in the valley of “just getting the books closed.” Migration to the next plateau of maturity – “closing the books completely and efficiently” – is typically not an easy leap. While many companies continue to experience longer-than-necessary close cycles, inadequate analysis of results, duplication of efforts and overall process inefficiencies, few have the appetite to undertake a focused improvement effort, saying instead, “...we will focus on the close process next month…”

As the economy continues to tighten, and more reporting requirements loom on the horizon (e.g., IFRS and XBRL), many organizations are now looking to drive greater efficiency and effectiveness into their close cycle. The challenge they are facing is how to undertake that effort in a manner that minimizes disruption and economically leverages both internal and external expertise.

Risks Impacting Quality and Timeliness
The lack of a disciplined financial close process exposes a company to a number of risks related to the quality and timeliness of their financial reporting:

1. Completeness and Accuracy/Quality – As the financial close process involves all the key activities for recording the numbers, a key question is, “Do we feel comfortable that all key close activities (e.g., accruals, allocations, intercompany, manual journal entries, reconciliations, etc.) have been completed and adequately analyzed and reviewed? Is there a risk of potential unbooked accruals or unapplied receipts because incomplete close tasks were not visible to leadership?
2. Timeliness – Public companies are subject to a strict set of deadlines that require additional time:
   1. Enhanced governance processes, such as Section 302 certification and more thorough preparation for management discussion and analysis.
   2. External auditor testing/review – delays in your close have a direct impact on audit efficiency.
   3. Audit committee review – adequate time needs to be allocated for management review so that results can be submitted to the audit committee with sufficient time for them to provide a value-adding review.

1. Control Efficiency – A high percentage of key and entity-level controls relating to the financial close are usually tested as part of Section 404 compliance. If the external auditor is not comfortable with the governance of the financial close and consolidation process, the company can quickly be exposed to a risk of a material weakness. Strong entity-level controls enable a company to manage the process with a smaller set of controls, permitting greater internal process efficiency and greater efficiency in the audit (i.e., fewer controls for the external auditor to test).
2. People – Without a comprehensive understanding of the composition and detail of the close process, it is difficult for a company to assess the volume and complexity of the work, and thus the nature and experience required to manage and perform the activities. Many companies experience high error rates in close procedures due to inappropriate task assignments. Uneven workload distribution can also lead to employee job dissatisfaction and low morale, further jeopardizing the quality of the work performed. In some cases, the lack of appropriate skills can lead to the risk of a material weakness.

Common Challenges
Experience shows that significant risk mitigation can be achieved by building (and managing against) a detailed close activity checklist. Pre-IPO, newly public companies and mature organizations alike stand to gain from improvements to the close cycle, as they can ill afford to have a bumpy ride on the road to their filings – be they the first or the fifteenth. Most companies have a “calendar” and many have a “checklist” but few actually have a process that enables or provides:

1. Daily monitoring of the close process at an activity level
2. Identification of dependencies
3. Documentation that can support management control and review requirements
4. Historical data capture that can be used to analyze and review the close process facilitating continuous improvement initiatives
5. The use of the checklist to assess and balance the allocation of the workload across numerous dimensions (e.g., by person, by risk, by degree of complexity, by level in the organizational hierarchy)

Often, the long cycle time and inefficiencies are driven by unclear responsibilities as well as a lack of clarity in the close process and company timelines, such as:

1. Limited oversight/monitoring
2. Due dates are moving targets
3. Lack of the “big picture”
4. Dependencies not understood
5. Checklist version control
6. Low-priority tasks in the critical path
7. Inefficient use of resources (such as allocation of low risk, low complexity tasks to senior personnel)
8. Unclear link to 302 certification

Leading Practices to Consider when Establishing a Close Checklist:
Leading companies take a foundational approach to resolve these challenges and mitigate their risks by employing a comprehensive “Close Activity Checklist.” In the ideal situation, a “self-reporting” approach (e.g., leveraging a special purpose application or a shared Excel file) is employed that can generate daily progress and exception reports. In addition:

1. Management can establish a consistent, activity-based process that reports on progress and challenges.
2. Executives can monitor the close process on a daily basis using dashboard reporting metrics.
3. The process and documentation can be used to establish a strong foundation for Section 302 certification, and inclusion of key review activities promotes a clear testing plan for Section 404 related requirements.
4. Information obtained from the tracking of historical performance can be used to assess opportunities for improvement in efficiency en route to meeting corporate as well as SEC filing deadlines.

The first step in developing a checklist is to understand the overall rollups and accountabilities. For example:

1. Do business units, individual locations and shared service centers need their own checklists?
2. Is there value in consolidating checklists for all entities, locations and divisions into one master checklist?

Once the tiers and level of detail required for the checklist are agreed upon, the next step is to design the format for the standardized checklist. To produce effective reporting, the checklist design should remain simple, but detailed enough to capture relevant data for each activity type (e.g., preparation, review, analysis, etc.). The value of the checklist is that it enables task-level management of the close process, which enables the monitoring of daily performance, as well as the capture of performance data that can be used to highlight areas that need redesign attention.

A leading practice is to establish the position of “Close Manager” in parallel with the creation of the close checklists. This individual is responsible for ensuring completeness of the close each month by monitoring performance during the close via daily status meetings and “issue resolution” checkpoints. This leader also works to continually improve performance by analyzing month-to-month performance against plan targets and recommending/implementing process changes.

Management Dashboards
Capturing the activity checklist in a spreadsheet enables preparation of a close dashboard that provides the organization with a high-level view of when clusters of close activities are actually performed. Dashboards can be used to monitor performance by region, function, activity category, individual, etc. These reports provide effective support to the daily close status meetings, and are useful in identifying opportunities for smoothing allocation of tasks, clarifying dependencies and redistributing the timing of activities.

A step-up from spreadsheets are financial close workflow automation tools that would have been classified as “emerging” four years ago. These tools now offer mature products that support the control and dashboard reporting for close tasks and should be considered the next step beyond spreadsheets for organizations who seek even greater oversight and control over their close processes.  Organizations with multiple locations involved in the close, numerous recurring close tasks, or significant close process dependencies are ideal candidates for a financial close workflow automation tool. 

Conclusion
A disciplined financial close process is instrumental in effective and efficient financial reporting. If the full range of close activities is not documented or well-understood, management will have difficulty both in controlling the process and identifying the root causes of delays.  Closer oversight at the activity level promotes a process-driven culture that enables:

1. Visibility of workload and measurability of performance
2. Transparency of the audit trail and ability to identify focus areas to improve overall productivity

Assigning ownership of the monitoring process to a ’close manager’ can further help the organization proactively respond to the day to day challenges of the close cycle.  Using the close checklist, a close manager can monitor tasks against the timeline and proactively identify and address issues before they have an impact on the reporting timeline.  While many companies still may require significant investments in infrastructure to enable dramatic cycle time improvements, a checklist can further serve as the foundation for requirements for a broader solution design.