Financial Reporting: How to Ensure the C-Suite Can Trust Your Numbers
Many business leaders feel hampered by untrustworthy data and questionable accounting and financial reporting. Here’s how to change that.
By Doreen Remmen, CMA, CSCA, CAE | Digital Exclusive - 2019
Nearly 70 percent of global business leaders and finance professionals believe their organization has made a significant business decision based on inaccurate financial data. This is according to findings of a
global survey by financial controls and automation software maker BlackLine Inc. Worse, 55 percent of respondents are not completely confident they can identify financial errors before reporting results, and 26 percent reported concern over errors that they know must exist, but of which they have no visibility. Headlines about inaccurate financial reporting naturally grab our attention.
These potential inaccuracies carry significant risk to the company, both internally and externally. For example, in January 2019, a major U.S. rental car company agreed to pay a multi-million-dollar settlement with the SEC. The company had reportedly relied on inappropriate estimates of how long they would hold a car before disposing, resulting in inadequate allowances and inflated reported earnings.
In 2018, a UK-based facilities management and construction firm was forced to liquidate after writing down unprofitable long-term construction projects. The decline in the value of its contracts was obscured in its financial reports at the same time its debt was increasing.
These high-profile corporate failures demonstrate the risk business leaders and investors face when relying on financial statements that may contain inaccurate data. One answer, of course, is improved internal control over external financial reporting. However, what about the daily internal management decisions and ill-advised strategies that are based on inadequate or inaccurate financial analysis? What solutions could proactive companies implement?
It is important to invest in appropriate training for your staff, implement efficient processes that reduce the opportunity for error, and employ the right technology. Streamlining the financial close as much as possible will free finance talent to focus on the financial planning and analysis that underpins good decisions. Steps to improve the financial close include:
• Document and standardize processes. Great documentation supports internal control and reduces the risk of noncompliance. Perform consistent, meaningful reconciliations each month. Prove out the balance sheet on a monthly basis — too many organizations focus only on the income statement between external reporting periods. Make sure there is a very clear monthly close process with a checklist of tasks that is rigorously tracked.
• Assign responsibility and define accountability. Make it very clear who is responsible for gathering specific data and performing each critical calculation.
• Automate the exchange of data. The importance of automation — and the appropriate use of software tools — cannot be overstated when it comes to ensuring accuracy between systems and preserving an adequate audit trail.
• Move as much as possible to mid-month. This includes the calculation of reserves, depreciation, testing of estimates, and non-key computations. Some reconciliations that have traditionally been a laborious month-end project can be more effectively performed on a weekly or daily basis.
• Implement continuous improvement of the close process. Ask what could have been done better, and how the process can be improved every month.
An improved monthly close process reduces the opportunity for error, increases efficiency, and creates more time for deeper financial analysis. This is key, as smart companies are increasingly engaging their finance staff in enterprise performance management, financial planning and analysis, and decision support. This requires skills that go beyond traditional accounting, audit, and financial reporting to include management accounting, budgeting, and forecasting that reflects the true drivers of costs and the relationships between various levers of profitability.
Important steps to develop your finance team’s management accounting skills and capabilities include:
1) Providing access to training that covers the expanding skills and body of knowledge — think technology and analytics, strategy, operations, ethics, leadership, business acumen, and more — necessary to support management decision making and establish effective planning and performance management systems.
2) Get finance involved in cross-functional team projects. Build effective working relationships between the finance team, sales, and operations, and other departments. Improve finance’s understanding of operational processes.
3) Move from data gathering and reporting to data analysis. With an increased understanding of how operational plans drive financial results, the finance team will be in a better position to identify the reasons behind plan-to-actual variances. Each iteration of the analysis should strengthen that understanding and contribute to improved operational performance.
With finance team resources properly allocated between external financial reporting and internal managerial accounting, organizations can improve the accuracy of the data on which they rely and the quality of their business decisions.
Doreen Remmen, CMA, CSCA, CAE, is the Institute of Management Accountants' (IMA) senior vice president of operations and CFO.