The financial close process is variously defined by auditing standards, consultant reports, and academics. It involves a complex set of activities that includes updating subsidiary ledgers, applying accounting policies and principles to year-end transactions, making adjusting entries, and preparing financial statements. The “last mile of finance” is a term that refers to a series of steps that culminate in the publication of the financial statements, which may include financial close process management, reconciliations management, intercompany transactions management, consolidations, financial control compliance, and financial statement production and disclosure management, among others. Mary Driscoll summed up the last mile of finance as a close-to-disclose process (The Last Mile of Finance: Growing Scrutiny). The types and sequence of steps vary from company to company.
The speed of the financial close process and the quality of the financial statements are arguably inversely related. A rapid release of quality financial information is generally advantageous to publicly listed corporations. In the late 1990s, Cisco reengineered the closing process and reduced the time frame to less than 24 hours, responding to market criticisms of its not having visibility into its financial statements.
Additionally, U.S. Securities & Exchange Commission regulations are shortening reporting periods, and new mandates such as eXtensible Business Reporting Language (XBRL) and complex accounting standards require more time to produce financial statements. Based on existing and projected developments in this area, we developed a continuum of the financial close process from basic to aspirational (see Figure 1). Given the uneven implementation of technology in the financial close process, we believe that internationally, “basic” to “best practices” scenarios simultaneously exist to varying degrees.
Most of the research in this area is U.S.-centric. Only two previous empirical studies examined the number of days in the financial close, and both were conducted by consulting companies. These studies weren’t published in peer-reviewed journals. Since data collection is a prime problem in this area, we believed there was an opportunity to make a unique contribution in this area and decided to conduct our own study.
As a result, in 2019, we surveyed 55 German corporations to assess the challenges faced in the financial close process (see Table 1). Approximately 80% of the companies were public or going public.
In a series of questions answered on a Likert-type scale, we assessed the challenges faced in the accounting, technology, organizational, and peripheral areas. We then examined the effectiveness of best practices that are often prescribed in the literature but that aren’t empirically evaluated. We also collected data regarding the number of days to close and whether the respondents thought the days were appropriate or needed downward remediation. Additionally, we asked the respondents about the financial consolidation packages used in the financial close.
Top Accounting Challenges
Accounting challenges were defined as problems related to the recording, processing, and structuring of transactional data. The main problem identified by the respondents was the lack of uniform company-wide procedures for data collection, recording, and reporting (see Table 2). This problem was more pronounced for medium-sized and larger companies. The secondary issue was the presence of more than one operating chart of accounts. This problem is more acute in multinational companies that need to meet local and central accounting requirements. In addition, an inadequate quality assurance system, which resulted in excessive adjustments, also delayed the financial close process.
Technological challenges in the closing process relate to the automatic, accurate classification and aggregation of data. We found fragmented financial systems to be the biggest problem. Data is often collected from paper, spreadsheets, diverse databases, and occasionally even from different enterprise resource planning (ERP) systems. The second issue was the need for advanced financial consolidation tools. This includes proper selection, configuration, application, and training with these tools, all considered essential in the last mile of finance.
Organizational challenges refer to the misalignment of organizational structure with the financial close process. Here we didn’t find any significant problems. The respondents reported that top management was committed to the closing process, responsibility for the closing process was clearly assigned, and internal and external accounting systems were harmonized. While the majority of respondents reported that the closing process was decentralized, they said it didn’t result in any significant problems.
Peripheral challenges in the financial close process include changes in the external environment that affect the process. Approximately 50% to 60% of respondents indicated that the close process was adversely affected by mergers and acquisitions activity and rapid growth or restructuring within the company. As expected, this problem was more pronounced in large and, to some extent, midsize organizations.
Best Practices Assessment
Financial close process literature often prescribes various best practices. We developed a series of best practices based on the literature survey, discussion with consultants, and our own experiences. Next, we organized each one across accounting, technological, organizational, and peripheral dimensions. Finally, we asked respondents to assess the effectiveness of these best practices (see Table 2).
In the accounting area, more than 80% of the respondents rated the identified nine best practices to be moderately to highly effective. The top three practices were as follows:
1. Reconciliations of subledgers to general ledgers or intercompany transactions are performed on a continuous basis, not at the end of the period.
2. Standardizing of collecting, presenting, and measuring transaction information.
3. Standardization of accounting procedures with a common chart of accounts.
The next two best practices are a structured process for subsequent adjustments based on the materiality concept and regular close (usually monthly) of subledgers and journals that feed data into the general ledger. If you recall the top accounting challenge stated previously, the identification of these best practices is evident. The final three best practices are the following:
1. Create automated entries for depreciation/amortization, accruals, and provisions.
2. Minimize complex calculations for provisions and inventory measurement during the year.
3. Minimize manual data entry.
Keep in mind that all of the identified nine best practices in Table 2 are effective to some extent in the financial close process, according to the respondents.
The following were considered the most effective best practices in the technology area. First, a powerful consolidation system for integrated financial consolidation purposes is necessary. Approximately 50% of companies consider this to be a highly or very highly effective best practice. Second, the organization needs to be standardized on the ERP level (template or one integrated ERP system running all functions). Finally, the ratings for the role of AI, machine learning, and robotics in the close process were low. We attribute this finding to the nascent stage of tools in this area. This rating will no doubt be different in five years.
In the organizational area, at least 80% of the respondents rated all 10 best practices as moderate to very high effectiveness. The top four best practices were the following:
1. Establishment of clear and regular communications.
2. Establish adherence to deadlines.
3. Assign responsibility for resolving discrepancies (intercompany reconciliation).
4. Develop cross-departmental collaboration to solve recurring cross-functional problems.
The rest of the best practices revolve around establishing clear responsibility for tasks in a closing schedule, automating approval processes, and standardizing key performance indicators. Again, notice the interplay between organizational and technological issues, as some of the process issues are best handled by technology.
Finally, in the peripheral area, our identified best practices revolve around the accounting process. There are no best practices that can reduce mergers, acquisitions, or restructuring activities identified as peripheral challenges. The top three best practices in this area are the following:
1. Move routine work or noncritical activities out of the closing time period.
2. Prepare checklists in advance.
3. Input all recurring journal entries at one time.
Prescriptive best practices are often mentioned in the literature, but the empirical evidence is sparse. This survey provides some basis for identifying best practices and ranking them.
Days to Close
As mentioned earlier, we also collected information regarding the number of days to close for each company—monthly, quarterly, and annually. The distribution of the annual days to close is shown in Figure 2.
We discovered, not surprisingly, that monthly and quarterly days to close are lower than annual days to close. The monthly close takes the fewest days, the quarterly close takes more days, and the annual close takes the maximum number of days. Given the importance of annual numbers, the managers allocate significantly more time to the annual close. Approximately 9% of the companies complete the close in fewer than 11 days or take 31 to 90 days. The majority of the companies complete their close within 11 to 30 days. The most interesting result was the appropriateness of the days to close. Approximately 84% of the respondents indicated that the days of their closing process were appropriate. There’s no real desire among managers to accelerate the closing process further. The data analysis shows no differences among small, medium, or large-sized corporations regarding this issue. We conclude that many German companies have found the sweet spot for the number of days to close the books and the resulting quality of the financial information.
The Institute of Management and Administration (IOMA) 2010 report, Improving the Financial Close: Benchmarks and Best Practices, gives information regarding the annual closing days for U.S. corporations (see Figure 3). The intervals are slightly different. It appears that U.S. corporations need a slightly lower number of days to close, but the differences aren’t statistically verifiable. It’s unclear if the U.S. managers also think that the days for annual close are appropriate. Another survey conducted by SVG & Co. in the Philippines in 1997 showed results similar to our results and the IOMA survey results (“Business Consulting: Closing the Books,” SGV Bulletin, May 3, 2001, pp. 1-9; see Figure 4). Interestingly, three different time periods and three different regions of the world show a similar number of days to close. A visual examination of the cumulative line in the graphs clearly indicates a similar pattern. Thus, the critical question is: What are the minimum days to produce quality—at least, compliance with Generally Accepted Accounting Principles or International Financial Reporting Standards (IFRS)—financial information? Is the cost to reduce the days to close justifiable in light of the benefits? The answer to this question can be helpful to consultants and financial consolidation tool vendors.
Top Tech Tools
We also collected information regarding technology tools used in the process. These tools are used in four phases of the last mile of finance—financial consolidation, financial and corporate reporting, close management, and reconciliations management. The top four ranked vendors in each category are SAP, Microsoft, IBM, and Oracle. The dominance of SAP is expected, given that data was collected for German corporations and SAP is based in Germany. Many companies use multiple tools in these phases, for example, BlackLine or Host Analytics (now Planful).
Overall, this article provides empirical findings in the financial close process. Literature in this area offers a number of insights into the process, but they need to be evaluated in a real-world setting. We identified the major accounting, technological, organizational, and peripheral challenges faced by German corporations and found that standardization of accounting data collection, recording, and reporting; multiple charts of accounts; inadequate quality assurance systems; fragmentation of financial systems; the need for powerful consolidation tools; and decentralization of the closing process are among the significant problems.
We also investigated the respondents’ perceptions regarding the effectiveness of the best practices that aid in the financial close process. The primary issues identified by the survey respondents concern reconciliations, standardization of workflows, communication, and cross-training. On the technology side, a powerful consolidation system (one ERP system) is considered critical to the financial close process. Additionally, most respondents think that days to close are appropriate for their corporations. These findings will be helpful to managers, consultants, and vendors involved in the financial close process.
September 2023
