FINANCE

Consolidation: Four Criteria for a Better Solution

September 2007

With increasingly accelerated filing requirements and more expansive corporate governance mandates anticipated in the coming years, accounting and financial reporting practices must become steadily faster, more visible, and more accurate. Corporations will need to direct significant time and resources to the cause. In effect, complying with Sarbanes-Oxley has become and will continue to be a cost of doing business in the United States.

Other mandates are also gaining influence. The impact of International Financial Reporting Standards (IFRS), the challenges of U.S. and other GAAPs, and the potential merging of related standards on a global basis will affect accounting and financial reporting practices in the coming years.

The first step toward compliance

Compliance is a business reality for publicly traded companies in the U.S. But as the regulatory climate shifts from immediate response to long-term sustainability, many finance executives are hard pressed to know what the next step is. Where does the organization proceed from here? What are the priorities in terms of changing internal processes and technologies so they're repeatable and effective?

The first priority is to focus on improving the core systems that directly support financial reporting and accuracy. This means looking at the processes for gathering, consolidating, and reporting financial information results, and finding improvements to deliver the information in a more transparent, accurate, secure, and timely manner.

The goal is to have a consolidation and financial reporting system that helps businesses effectively manage their financials; reduce the risk factors for errors, fraud, and manipulation; lower the cost of compliance audits; and accelerate the closing and reporting process.

Reliable financial data is the backbone of compliance, and a robust consolidation system provides the foundation for accountability. And this is the jumping off point for delivering greater transparency and management of company performance – the broader, sustainable objectives going forward.

Addressing the consolidation challenge

Meeting the consolidation challenge is difficult because organizations use manual, inadequate, or multiple consolidation systems for their financials. The result: they are unable to structure, control, and automate the process for internal and external reporting, and are unable to gain a single, accurate view of financial results.

ERP Systems: ERP and ledger systems are excellent for storing data and managing the transactions that support the business. Unfortunately, they're not designed to easily integrate or consolidate data from other sources.

To produce appropriate financial statements, a single aggregated view across all transactional systems is required. To ensure the closing process is timely and accurate, the system must handle all the complexities of consolidation – such as currency conversion and inter-company eliminations. What's more, it is not flexible enough to manage the accounting of business changes – such as mergers and acquisitions – in a timely manner.

Spreadsheets: Multiple spreadsheets make each person or department an island of report information. This can lead to duplicated effort and opens the door to inconsistent data interpretation. Who has the right numbers?

In the Sarbanes-Oxley era, internal control risk is directly linked to the degree of spreadsheet use within an organization. Spreadsheets drive unacceptable rates of input errors – from data entry, re-keying, and cut-and-paste activities.

Security of spreadsheets is inherently problematic, since communication of information is via emails or shared drives. As well, auditing of spreadsheet content is virtually non-existent, since there is no systemic ability to track who received what information or who made which changes to the data.

Compliance calls for a better solution

Companies need a consolidation system that streamlines processes, ensures accuracy, and helps control costs. It is essential that the system deliver in these areas:

A single, centralized platform for all processing and calculations. It is no longer appropriate to provide supplementary processing with multiple systems, spreadsheets, and people.
Financial reporting from a single version of the truth. Reporting must also support delivery of many styles and types of reports, and providing a line of sight from management reports to financial statements.
Future-proofing of consolidations. As requirements such as IFRS enter the fold, systems need to be able to handle the different consolidation and reporting complexities driven by common accounting standards and reporting.
Adaptable to business change. The current pace of business requires a new degree of agility and nimbleness in finance. As organizations add and divest new entities, financial results must reflect these changes in a timely manner.

Compliance leads to good business practices

Compliance is a critical driver for publicly traded companies. But improving business practices is just as relevant for private companies, as Finance gains greater visibility into business perfomrance and achieves greater accountability.

These objectives are key to business success, whether you are a private or public organization. And ultimately, an investment in performance management will also give your company a true competitive advantage.

Find Out More

Download the Cognos White Paper, Consolidation: Laying the Groundwork for Sustainable Compliance
Read the related story, "A Blueprint for Better Management and Financial Reporting"