Closing Excellence
- An analysis of the financial reporting
process of 60 large and medium-sized
Danish companies
November 2011
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Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
Contents
1
2
3
Companies analysed – method and purpose
4
Executive summary
6
Priorities and challenges
8
4
Reporting cycle times
5
Process efficiency
6
7
8
Ernst & Young’s 10 recommendations for improved financial reporting
26
Final remarks
28
Ernst & Young contacts
29
3.1
3.2
4.1
4.2
4.3
4.4
4.5
5.1
5.2
5.3
5.4
5.5
5.6
Priorities
Challenges
8
9
11
Analysis of reporting cycle times
Reporting to parent company
International benchmarks on reporting cycle times
Analysis of reporting cycle times in relation to the companies’ own focus areas
Analysis of High and Low performers’ reporting cycle times
12
14
15
16
17
18
IT systems
Centralisation and training
Standardisation and automation of the reporting process
Standardised processes and procedures
Number of FTEs
Financial entries
18
20
22
23
24
25
Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske virksomheder
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1
Companies analysed – method and purpose
With this publication Ernst & Young wishes to contribute to the continued development of the reporting process of Danish companies
and, in particular, to provide qualified input as to what focus areas
are relevant to companies wishing to improve their financial reporting process.
This publication is based on data compiled from 60 large and medium-sized Danish companies. The companies’ Finance responsibles
were asked to fill in a web-based questionnaire in order to uncover
trends in the companies’ financial reporting and the underlying financial processes. The questionnaire included a number of questions
related to financial reporting, the underlying financial processes
as well as the companies’ own views on priorities and challenges in
improving the financial reporting process.
Figure 1.1 – Characteristics of the 60 companies analysed
Revenue
21
Local business units
FTEs
14
15
17
25
30
< DKK 500 million
DKK 500 - 5,000 million
> DKK 5,000 million
24
Listed/non-listed
Regulatory framework
22
26
38
Listed
Non-listed
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1-5 units
6-30 units
> 30 units
16
< 250 FTEs
250 - 1,000 FTEs
> 1,000 FTEs
18
Group structure
27
34
Danish Financial
Statements Act
IFRS
Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
33
Group Company
Ultimate parent
The analysis provides insight into the trends found in the current
financial reporting process of a large group of Danish companies,
including the respective Finance responsibles’ perceptions of the
challenges involved in improving such a process. So, more than just
an empirical analysis, we attempt to convey “real life” issues facing
the companies.
For the purpose of the analysis, we have broken down the financial
reporting process into the following five steps with particular focus
on the reporting time for each step:
•
•
•
•
•
In order to identify comparable underlaying trends in the financial
processes, we have grouped the companies into High, Medium
and Low performers based on the average total reporting time for
the combined process steps Local business units, Consolidation,
and Internal Reporting. The High performers are defined as the
12 fastest companies; the Low performers are defined as the 12
slowest companies; and the Medium performers are defined as
the remaining 36 companies. Averages are used for all measures
indicated for these groups.
In so far as we have found it useful for the purpose of the analysis,
we have incorporated international benchmarks 1 to compare to
the results of the Danish analysis.
Local business units
Consolidation
Internal reporting
External reporting
Reporting to parent company
The 60 respondents do not constitute a representative statistical
analysis of the financial reporting process in Danish companies as a
whole, as this was not the purpose of the analysis.
The companies analysed have reported the number of (additional)
working days for the individual process steps. This allows benchmarking of the reporting time for the individual steps as well as the
aggregate reporting time for the financial reporting process as a
whole.
1
Ernst & Young cooperates with APQC, an international
center providing independent, fact-based analysis
with benchmark data from well over 2,300 businesses.
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1 Companies analysed
and
and danske
purpose
of the analysis
Closing Excellence - En analyse af finansielle rapporteringsprocesser
i 60 store
ogmethod
mellemstore
virksomheder
2
Executive summary
The need for a more efficient financial reporting process can be
driven by the desire for a more cost-efficient process as well as
both external and internal stakeholders’ demand for faster information. But it is also key to note that the role of the finance department is under transformation. Not only must information be communicated at a higher speed – it must also increasingly support the
business and the decisions made by management. This requires a
change in the role of the finance department from merely provider
of information to the role of analyst. An efficient and fast reporting
process is key to this transformation.
The analysis shows great differences among the companies analysed when it comes to reporting time. For instance, the time it
takes High performers to prepare annual internal reporting is 12.2
days on average (Figure 4.10), whereas its takes Low performers 36 days on average, i.e. approximately three times as long. An
interesting trend in the analysis is that High performers are faster
at all process steps (i.e. Local business units, Consolidation and
Internal reporting). Good habits are self-reinforcing and flow to all
parts of the process.
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It is characteristic of High performers that they have better integrated IT systems and a highly centralised finance function. Also,
the analysis shows that focus on human resource development,
standardised processes and procedures as well as automated reporting are important elements in the effort to improve the financial reporting process.
The primary challenges facing the companies when they seek to
optimise their financial reporting process concern IT systems (particularly integration between systems and modules) and resources/bottlenecks. A common feature of insufficient integration of IT
systems and bottlenecks is that they consume resources that could
otherwise be allocated to analysis or other forward-looking activities, thereby contributing to value creation and business support in
the finance department.
In light of the financial reporting process as one of the key elements in the finance department’s transformation from production
of financial reporting to analysis, we have chosen to summarise 10
recommendations for improved financial reporting:
Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
Ernst & Young’s 10 recommendations for improved financial reporting
01
02
03
04
05
06
07
08
09
10
Implement a process for continuous improvement of the financial reporting process
Focus on processes and IT systems – and particularly on employees and change management
Assign ownership of the financial reporting and manage it through a clear division of roles and
responsibilities
Implement a complete and available finance manual
Create a process for efficient resource and skill management
Standardise processes, procedures and internal controls
Implement a complete reporting calendar and use it actively as a management tool
Automate processes and procedures
Reduce the risk associated with spreadsheets
Perform activities earlier
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2 Executive
summary
Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske
virksomheder
3
Priorities and challenges
The role of financial reporting is
undergoing significant change.
Where focus used to be primarily
on the presentation of historical performance, the companies
we analysed clearly want the
finance department to take a far
more proactive role in supporting the business by providing
reliable and timely information
to management. In other words:
focus is shifted from production
to analysis.
3.1
Priorities
Transforming the finance function from production to analysis is a
demanding process – especially in times of crisis where focus is on
resource consumption and expenses. First, the quality of reporting must be maintained or increased. Second, the transformation
towards a more business-oriented finance department places new
and higher demands on the company’s financial processes, IT
systems and employees.
Figure 3.1 – Transformation of the allocation of resources in the
finance department
Analysis
Analysis
Control
Control
Production
Production
Across the organisation
Optimising the financial reporting process calls for a broader approach focusing on the financial
processes, the IT systems and the employees.
Ernst & Young
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Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
We need to improve processes to release
time to focus more on business support.
Finance responsible of a company with more than 1,000
employees and annual revenues exceeding DKK 5.0 billion.
The challenge facing companies today is that they need to meet
increased quantitative and qualitative requirements, while at the
same time keeping a sharp focus on expenses. The solution is to
optimise and improve the efficiency of the company’s financial reporting process so that it can provide more and better information
using the same or fewer resources.
Figure 3.2 – How the companies prioritise improving the financial
reporting process
This conclusion is further supported by data in the analysis showing that 74% of the respondents consider it important or very
important to improve their financial reporting process.
3.2
Challenges
It is evident from the responses we have obtained that the companies wish to change the role played by the finance department and
that one of the means to this end is process improvements. In the
analysis, we investigated the areas that the companies themselves
believe pose the largest, specific challenges to an optimisation of
the financial reporting process.
Figure 3.3 – Number of companies that have prioritised the following
challenges as 1st, 2nd or 3rd priority
26%
IT systems
Resources/bottlenecks
74%
Time/process management (deadlines)
Low priority
High priority
Cross-functional coordination
Skills
Use of spreadsheets
IFRS/GAAP issues
Overview of the process
Other
0
5
10 15 20 25 30 35
Release time for analysis
A systematic and structured review of companies’ financial reporting process can release time from
production to be used on analysis instead.
Ernst & Young
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Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore
3 Priorities
danske virksomheder
and challenges
3
IT systems are considered the main challenge for all the respondents, irrespective of whether they are categorised as High performers, Medium performers or Low performers. The replies we
have received show that the challenges posed by IT systems cover
several aspects. Some companies report having difficulty adapting
their IT structure to the reporting requirements, whereas other
companies have problems integrating different systems.
Figure 3.4 – The companies’ priorities relating to an improvement of the financial reporting process
IT Systems
High Performers
27%
Cross-functional
coordination
Resources/
bottlenecks
Time/process manage- Use of spreadsheets
ment (deadlines)
18%
18%
–
–
Medium Performers
23%
–
19%
13%
–
Low Performers
24%
16%
–
–
20%
First priority
Second priority
Many of the challenges facing the respondents span across the
above issues. For instance, several respondents consider it a big
challenge to obtain the required data from other parts of the organisation, which may be both an organisational and an IT-related
issue.
Overview and responsibility create a better flow
A key element of an efficient financial reporting process is to have a good overview of the process and
its components. The process needs to be well-defined so that all parties involved have a clear picture of
their respective role and responsibilities, what the output is used for and what deadlines apply to their
individual workstream as well as the overall deadline for the entire process. Overview and structure in the
process create a better flow and thus, a faster reporting process.
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Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
Third priority
4
Reporting cycle times
Faster reporting may be an objective in itself. The company’s
management and external
stakeholders require prompt and
reliable information. But faster
reporting is also an indicator
of a finance department that is
performance-oriented and that,
to a wider extent, can allocate
resources to forward-looking and
business-supporting activities.
In this section we will go through
the results of the analysis that
relate to reporting time.
Reporting cycle time is a key parameter for large and mediumsized companies today. Timely, reliable and relevant reporting is
essential to support management’s decision making. Similarly,
external stakeholders require up-to-date and relevant information
to support their decision-making process. This focus on timely and
reliable information is reflected in a number of the issues, which
the respondents mention as reasons for improving the financial
reporting process.
The 60 companies participating in the survey have answered a series of questions regarding the number of working days they spend
on the periodic financial reporting process. The replies reflect big
differences. We have broken down the financial reporting process
into the steps shown in figure 4.1. In addition, the companies have
seperately reported the number of days spent on monthly, quarterly and annual reporting.
Figure 4.1 – Process steps in the financial reporting process
External reporting
Local business
units
Consolidation
Internal reporting
Reporting to parent company
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Reporting
cycle times
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4
4.1
The data includes a number of trends based on various groupings of the companies. Below we will go through the cycle time of
the individual steps of the reporting process and highlight trends
depending on size. In addition, we will analyse reporting cycle
times for the High performers and point out important correlations between the companies’ own focus areas and the number
of reporting days. Finally, the section will describe those special
processes where companies, that are subsidiaries report to parent
companies.
Analysis of reporting cycle times
There is great diversity among the 60 companies analysed. Here,
the responses for each of the individual process steps are presented showing the fastest 20%, the slowest 20%, as well as the median
and the average for the group. Therefore, the shown responses do
not take into account the total reporting time from the start to the
end of the financial reporting process. The fastest and slowest 20%
within each individual process step, therefore, should not be confused with High and Low performers, defined in section 1 above.
Figure 4.2 – Reporting cycle times within each individual process step and montly, quarterly and annual reporting
Local
business units
Consolidation
Internal
reporting
External
reporting
Average
Fastest 20%
Median
Slowest 20%
6.7
4.2 0.8
0.3
5.7
1.2
5.0
5.0
8.0
Average
Fastest 20%
Median
Slowest 20%
2.3 0.5
1.6
9.8
3.2
1.0
2.0
3.0
Average
Fastest 20%
Median
Slowest 20%
Time spent on monthly
reporting
Additional time spent on
quarterly reporting
Additional time spent on
annual reporting
3.0
1.0
6.0
2.1 0.7
2.2
1.0 1.0
2.0 1.0
2.4
Average
Fastest 20%
Median
Slowest 20%
2.4
2.2
6.1
1.6
11.5
2.4
3.0
7.0
12.0
0
2
4
6
8
10
12
13.0
14
16
18
20
22
Fast reporting is key
Fast, reliable and relevant reporting is key to management’s capability of managing the company. In a
globalised and digitalised world, high-performing companies are those that manage to quickly adapt to
change. Fast and reliable reporting is key to the company’s possibility of responding.
Ernst & Young
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Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
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26
We need to close faster. In 5-7 days.
Finance responsible of a company with more than
1,000 employees and annual revenues between
DKK 500 million and 5.0 billion.
As for the monthly reporting, the fastest 20% of respondents close
the local business units within the first 4.2 days of the month,
whereas the slowest 20% use 8 days or more. The deviation between the fastest 20% and the slowest 20% is even more significant
in relation to the quarterly and annual reporting processes. For the
quarterly reporting, the reporting days are 5 for the fastest 20%
and 9.6 for the slowest 20%, whereas for the annual reporting they
are 6.2 and 19.4 days respectively. When preparing the annual
reporting, the slowest 20% companies thus take about three times
longer to close the individual business units than the fastest 20%.
A similar picture is reflected in the analysis of both the consolidation process and internal and external reporting. In connection with
the annual reporting, there are significant differences between the
fastest and the slowest businesses analysed.
Figure 4.3 – Reporting cycle times in days, annual reporting
Fastest 20%
Median
Slowest 20%
Average
Local business units
6.2
10.0
19.4
12.8
Consolidation
1.0
5.0
10.0
6.0
Internal reporting
2.0
3.0
7.0
5.0
External reporting
4.4
10.0
25.0
16.5
Many different factors underlie the reason for these great differences, including the size and complexity of the companies. In
spite of our expectation that the larger the businesses are, the
more complex their financial reporting process will be, the analysis
shows that the larger the businesses are, the faster their financial
reporting process is. This pattern is repeated if the size indicator
used is revenue or number of employees, whether the company is
listed, or according to which financial reporting class in the Danish
Financial Statements Act the financial statements are prepared.
Figure 4.4 – Development in number of reporting days based on different size indicators
35
FTEs
Number of days
35
30
Revenue
Number of days
35
Listed/non-listed
Number of days
35
30
30
30
25
25
25
25
20
20
20
20
15
15
15
15
10
10
10
10
5
5
5
5
0
< 250
250 - 1000
Local business units
> 1,000
0
Consolidation
0
< 500
500 - 5,000 > 5.000
DKK Million
Internal reporting
Non-listed
Listed
0
Reporting classes
Number of days
B
C
D
Danish Financial Statements Act
External reporting
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Reporting
cycle times
Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore4danske
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4
So, even if the companies grow and their financial reporting process becomes more complex, an increased need for faster reporting makes the companies accelerate the process.
However, in connection with the external reporting framework
used, the picture is ambiguous. We expected that companies whose
external reporting is prepared in accordance with IFRS would take
longer preparing their external reporting than those reporting in
accordance with the Danish Financial Statements Act - due to the
higher complexity of the IFRS framework (including many and detailed note disclosures). However, the analysis shows but a limited
difference in this respect.
It takes companies applying IFRS an average of 16.7 days to prepare
the external annual report, whereas it takes companies applying
the Danish Financial Statements Act 16.3 days – i.e. a very small
difference. The analysis does not provide any explanation for this,
but we are convinced that the reason lies in the fact that companies
reporting under IFRS experience more pressure – internally as well
as externally – to have the annual report prepared quickly. For many
companies, this implies that they do in fact perform part of the financial reporting process earlier. An example of this is the preparation of
an annual report template prior to year-end.
4.2
Figure 4.5 – Reporting cycle times in days in connection with the
annual reporting
18
Danish Financial Statements Act
Number of days
16
Those companies analysed, that are subsidiaries of a parent company have reported how many days they use to prepare reporting
to their parent company.
As is the case with the other process steps analysed, the number
of days used increases from monthly to quarterly and annual
reporting. This increase is expected due to the increased disclosure
requirements in connection with quarterly and annual reports in
accordance with either IFRS or US GAAP 2. Furthermore, there will
often be more focus on going through and analysing the figures
before the quarterly and annual reports are completed.
14
12
10
8
6
4
2
0
IFRS
Reporting to parent company
Local business
units
Consolidation
Internal
reporting
External
reporting
In addition, this process step shows a considerable disparity between the fastest 20% and the slowest 20% in line with the other
steps in the financial reporting process.
2
IFRS and US GAAP are the two primary sources of
reference used by the respondents when reporting to
a parent company.
Avoid the Q4 effect
Many companies could benefit from placing more focus on ensuring the quality of their interim reporting. In practice, we often see that a number of entries that should in fact have been made during the
year are made in connection with the year-end closing process. First of all this results in the quality of
the interim reporting not being sufficiently high, second of all it creates an unstable development in Q4
figures. Companies placing strong focus on the quality of their interim reporting have a faster year-end
closing process – partly because more issues have been resolved on an ongoing basis, and partly because the process has become an integral part of the day-to-day operations of the finance department.
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Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
4.3
Figure 4.6 – Reporting to parent companies, number of days
16
Fastest 20%
Number of days
Median
International benchmarks on reporting cycle times
The key figures obtained regarding reporting cycle times are
comparable to international benchmarks. The Danish companies
analysed show the same trends as the international companies.
Slowest 20%
14
12
10
8
6
4
2
0
Monthly reporting
Quarterly reporting
Annual reporting
Figure 4.7 – Comparison of Danish and international benchmarks on selected reporting cycle times
Local
business units,
monthly reporting
International benchmark
Local
business units,
annual reporting
International benchmark
External
reporting,
annual reporting
International benchmark
Internal
reporting,
annual reporting
3.0
Danish benchmark
2.0
5.0
4.2 0.8
3.0
4.0
3.0
Danish benchmark
6.2
2.0
3.8
9.4
3.0
Danish benchmark
9.0
4.0
International benchmark
3.0
Danish benchmark
2.0 1.0
0
16.2
6.0
2.0
15.0
8.0
Number of days
4.0
5
10
15
20
25
30
Time spent, fastest 20%
Additional time spent, median
Additional time spent, slowest 20%
Efficient management of the entire process
The financial reporting process should be owned by the finance department. In practice, this means that
the finance department takes ownership of and, thus, manages the entire process. The best results are
achieved when companies develop a concrete governance model, which defines roles and responsibilities
across functions and departments.
Ernst & Young
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Reporting
cycle times
4
Concerning local business units, the fastest 20% of Danish companies use more time to complete the process step than the international companies. The slowest 20% of Danish companies are, on
the other hand, faster than the corresponding international benchmark. So, the disparity is even greater in the international analysis
than in the Danish one. But, the overall picture is that 80% of the
Danish companies analysed close Local business units within a
period of 8 days for the month and 19.4 days for the year, whereas
the 80% fastest international companies use 10 and 23.2 days,
respectively.
Concerning preparation of the external reporting, the difference
between the Danish and the international benchmarks is significant. Here the fastest 20% in the international benchmark use 2
days to complete the external reporting, whereas the Danish companies use 4 days. Similarly, 80% of the international companies
complete the annual report in a matter of 14 days, whereas the
same process takes 80% of the Danish companies 25 days.
It is, however, remarkable that the Danish companies in all categories are faster when it comes to preparing the internal reporting,
which sharply contrasts with the picture of the external reporting.
4.4 Analysis of reporting cycle times in relation to the
companies’ own focus areas
As described in section 3 above, many respondents have indicated
that both IT systems and resource/bottleneck problems are focus
areas in connection with the improvement of their financial reporting process. A cross-reference of the reporting cycle times relative
to these elements clearly reflects that the companies’ financial
reporting process is affected by whether the focus areas IT systems
and resources/bottlenecks are part of the companies’ prioritised
action areas.
The analysis indicates that companies considering IT systems and
resources/bottlenecks their primary challenges have processes
that are considerably affected by weaknesses in these areas.
Companies considering IT systems a challenge generally have a
longer reporting time for both of the elements Local business units
and Consolidation. This seems natural, as these process steps typically will be the ones that are the most automated. Whereas the
process steps Internal reporting and External reporting do not provide an unambiguous picture of neither faster nor slower reporting
due to the prioritisation of IT as a focus area.
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Figure 4.8 – Reporting cycle times analysed according to the
companies’ prioritisation of IT
20
18
16
14
12
10
8
6
4
2
0
Number of days
Local business
units
Prioritised
Consolidation
Internal
reporting
Not prioritised
External
reporting
Companies considering resources/bottlenecks a challenge display
marginally longer reporting cycle times in Consolidation as well as
both Internal reporting and External reporting. This also seems to
be a natural consequence of the fact that challenges relating to
resources/bottlenecks will affect the process as a whole, as each
process step involves complex/specialised issues where core skills
are required and, hence, bottlenecks may often become a problem.
Particularly the process step External reporting reveals significant
differences as to reporting cycle times, as companies needing to focus on resources/bottlenecks in the future use an average of 24.7
days, whereas the other companies use 12.2 days on average.
Figure 4.9 – Reporting cycle times analysed according to the
companies’ prioritisation of resources/bottlenecks
30
Number of days
Prioritised
Not prioritised
25
20
15
10
5
0
Local business
units
Consolidation
Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
Internal
reporting
External
reporting
4.5 Analysis of High and Low performers’ reporting
cycle times
Looking at the High and Low performers, we observe a similar
trend as above: a considerable disparity among the 60 companies
surveyed.
High performers’ average reporting time for the individual process
steps is in all respects shorter than that observed for both Medium
and Low performers. It is thus a clear trend that companies that
perform one step of the process quickly typically also perform the
other process steps quickly. High performers show a total reporting
time of 12.2 (Internal reporting) and 20.3 (External reporting)
days, whereas Low performers show a reporting time of 40.2 (Internal reporting) and 44.8 (External reporting) days.
Figure 4.10 – Average annual reporting cycle times, High and Low performers
Average
12.8
High performers
6.7
Medium performers
3.0
5.2
6.6
16.5
2.5
10.6
12.5
4.6
6.2
Low performers
19.6
19.6
0
5
10
Local business units
15
9.6
11.0
20
Consolidation
25
30
Internal reporting
It should be noted that Medium performers’ average for External
reporting (19.6 days) is affected by certain companies having an
unusually long reporting time in this area. If these companies are left
out of the average computation, Medium performers’ reporting time
for the External reporting is 12.8 days and, thus, faster than that
demonstrated by Low performers. The total average for External
reporting decreases from 16.5 to 12.6 days.
High performers are companies of varying size and complexity and
include both very big Nasdaq OMX C20 companies as well as small
Number
of days
14.2
35
40
45
50
External reporting
listed and privately owned companies. But common to them all is
that they score in the upper 20% on most of the process steps. A
similar pattern can be observed for Low performers. Consequently,
the average values show that High performers as a whole report
approximately 2-3 times faster than Low performers.
Section 5 that follows includes an analysis of the underlying financial
processes for High, Medium and Low performers as well as Ernst &
Young’s analysis of what characterises High performers.
Perform activities earlier
Companies wanting to optimise their financial reporting process should identify the activities that
can be carried out either prior to - or earlier during - the financial reporting process. For instance,
complex accounting issues should be resolved on an ongoing basis so that they do not slow down the
process.
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Reporting
cycle times
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5
Process efficiency
An efficient financial reporting
process calls for well-designed
processes, well-organised and
competent employees and – not
least – IT systems. The trend
revealed by the analysis is clear:
integration, standardisation,
centralisation and skills are key
to a more efficient financial reporting process.
5.1
IT systems
As described in section 3 above, the respondents generally consider IT systems a great challenge in relation to an optimisation of
the financial reporting process. This is backed by the fact that 57%
of the respondents do not have fully integrated IT systems in place,
which increases the need for reconciliations and other manual
control procedures.
Therefore, it is a clear trend that companies with the fastest reporting have a better integrated IT structure. This applies both to
integration between the ERP system and other systems, integration between the general ledger and sub-ledgers, and adaptation
to reporting requirements. Looking at High and Low performers’
focus areas in these two fields, we see great differences. High
performers have fully integrated ERP systems and sub-systems to
a much wider extent than Low performers. Also, High performers
make more use of automated reconciliation of sub-ledgers. Similarly, Low performers tend to have non-integrated systems and
manual data transfer requiring manual and, thus, time-consuming
reconciliations.
With the same reference to IT systems, the segmented analysis of
High and Low performers also shows significant differences as to
the degree of automation of the consolidation process. High performers use designated consolidation tools to support the consolidation process to a higher degree, whereas Low performers tend to
use the general ledger supported by spreadsheets for consolidation
purposes.
Automation minimises errors and speeds up the process
The financial reporting process is highly affected by the companies’ IT applications. Insufficient integration between systems usually calls for more time-consuming and manual procedures, increasing
the risk of error. An optimisation of the financial reporting process should, as a main rule, focus on
minimising the manual elements of the process, including enhanced system integration.
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Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
Our world is becoming too complex.
We want to make it more simple and efficient.
Finance responsible of a company with more than 1,000 employees
and annual revenues exceeding DKK 5.0 billion.
Figure 5.1 Degree of system integration, integration between sub-ledgers and the general ledger (GL), and integration in consolidation
Systems and
integration
Fragmented systems
with redundant and
inconsistent data and
extensive Excel-based
reporting
Score
1
Sub-ledger interface
and reconciliation
Sub-ledger data are
reformatted and manually entered/uploaded;
adjusting entries are
required
Score
The consolidation
sub-process
Fragmented systems
with manual steps in
place to address data
consistency and accuracy
2
Sub-ledger data are
interfaced with GL,
but requires manual
intervention and
manual reconciliation
to test data integrity
and accuracy
Single master data systems within business
units; some manual
procedures to interface
Best of breed automated systems are interfaced to general ledger;
workflow approvals for
journal entries
Integrated ERP platform and common
Chart Of Accounts.
Business Process
Management platform
interfaced to GL and
operational databases
for reporting data
3
4
5
Sub-ledger data are
electronically transferred to GL with
web-enabled interfaces
and automatic data
capture, few adjustments are needed
Sub-ledger data are automatically interfaced
and balanced daily
Sub-ledger data are
transferred to GL
electronically; topside adjustments are
required
1
2
3
4
5
Close/consolidation
process is complex
and manual with high
degree of adjustments
and reconciliations
Infrequent feeds to
reporting system with
spreadsheet or manual
consolidation and reporting process
Consolidation done
primarily in ledger with
some Excel reporting
Streamlined consolidation using a dedicated
consolidation tool
Automated consolidation and elimination
entries for legal,
sta­tutory and management books. Workflow
application in place to
integrate management
review in the internal
and external reporting
process
1
2
3
4
5
Score
High performers
It comes as no surprise that the degree of IT integration plays a key
role. A high degree of IT integration reduces the need for manual
procedures, reconciliations and corrections.
Medium performers
Low performers
Developing a better integrated IT infrastructure may – depending
on the circumstances – be a relatively resource-demanding process,
but the analysis shows that a considerable improvement potential
may be realised in many companies through such a process.
Manage the risk related to spreadsheets
Many companies do not pay sufficient attention to mitigating the inherent risk in the use of spreadsheets. In our experience, spreadsheet models very often contain a considerable number of errors and
deficiencies. The risk involved may be reduced substantially through a conversion to automated IT reports
(e.g. by using the reports in the ERP system or Business Intelligence systems) or, alternatively, in the
form of spreadsheet models that have the necessary transparency, consistency and robustness.
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5 Process
efficiency
Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske
virksomheder
5
5.2
Centralisation and training
Figure 5.2 – Centralisation of the finance department
Another essential factor affecting the speed of companies’ reporting process is the degree to which the finance department is centralised. The analysis shows that 75% of the respondents have not
centralised their financial reporting activities to a high extent.
25%
39%
This finding is particularly interesting, as the analysis shows a
significant connection between the degree of centralisation and the
speed at which the companies analysed report. High performers
score significantly higher than the rest of the population in terms
of centralisation as, to a higher degree, they centralise their activities at country level. Low performers only make use of centralisation to a very limited extent.
Little or none
Some
High
36%
Another result of the analysis is that centralisation – e.g. through
the establishment of a shared service center - enhances process
efficiency, as we see a clear relationship between the degree of
centralisation and the reporting time. One reason is that a higher
degree of staff specialisation is possible, another is that centralisation allows for more uniform procedures, controls and recording of
transactions. Presumably, companies with a high degree of centralisation have implemented a number of optimisation measures
as part of the centralisation process.
Figure 5.3 – Degree of centralisation and outsourcing
Outsourcing and
centralisation
Score
Few transactional activities are outsourced
or centralised; no
global centralisation or
outsourcing
Some outsourcing or
centralisation, but not
country- or world-wide
1
2
Partial outsourcing
or centralisation by
country
3
High performers
Majority of transactions are centralised by
country and recorded
consistently across the
region
All transactional
activity is outsourced
or handled in shared
services center environment
4
Medium performers
5
Low performers
Standardisation works
Centralisation of the finance department often has a positive effect on the financial reporting process,
since centralisation requires standardisation in the form of a clear division of roles and uniform procedures and controls. At the same time, economies of scale can be achieved and existing resources may
be better utilised due to improved skill levels.
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Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
A similar trend is noticeable in relation to staff development and
training. Largely all of the respondents place some or high focus on
training and developing their employees.
Figure 5.4 – Training and development of employees in the finance
department
4%
However, a segmentation of the analysis by High and Low performers reveals that High performers place considerably more focus on
staff training and development than Low performers. Thus, High
performers have to a wider extent implemented training and development programmes for employees in the finance department and
focus more on rotation programmes and executive programmes for
selected employees. Low performers tend to have an ad hoc-based
training set-up.
23%
74%
Little or none
Some
High
Figure 5.5 – Scaling of staff training and development
Development and
training of finance
organisation
No development or
training available to
employees
Score
1
Limited development
and ad hoc training
2
Functional training and
development programs
are in place
Rotation programs and
leadership training are
available for selected
individuals
FInance staff rotations and leadership
programs are in place
3
4
5
High performers
Medium performers
Low performers
It seems clear that increased centralisation and focus on staff
development and training contributes positively to the financial
reporting process. This area is particularly interesting, because the
respondents – as discussed in section 3 above – generally have an
ambition to shift their focus towards more analysis and business
support. Presumably, such a shift in focus will call for an upgrading
of the employees’ skills and business understanding.
Optimise resources and skills
Companies should systematically evaluate their employees’ resources and skills. Deviations between
existing resources and skills on the one side and the company’s needs on the other may be reduced
through education, training and re-organisation.
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Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske
virksomheder
5 Process
efficiency
5
5.3 Standardisation and automation of the
reporting process
Figure 5.6 – Automation of the internal and external reporting process
The analysis shows that both the internal and external reporting
process involve a high degree of manual work. 80-85% of the respondents either use a spreadsheet-based solution or have automated their reporting process to a limited extent only.
It is evident from the results of the analysis that High performers
have automated their internal and external reporting process to
a significantly higher degree. This is not surprising, since manual
processes are more time-consuming and involve a higher risk of
error than automated processes. Also, the analysis shows a clear
relationship between the degree of automation and the reporting
time.
Internal reporting
External reporting
15%
20%
34%
41%
44%
46%
Excel-based
Some automatisation
High degree of automatisation
Figure 5.7 - Degree of automation in the preparation of internal reports
Preparation of internal reporting
Score
Internal reporting is
prepared in Excel
1
System runs Profit
& Loss and Balance
Sheet but manual adjustments are required
Preparation of the Balance Sheet and Profit
& Loss is automated;
Cash Flow is manual
2
3
High performers
However, there seems to be room for improvement for the entire
population, which could benefit from a more automated financial
reporting process – both for Internal and External reporting – rather than a highly manual set-up mainly based on the use of Excel,
Word, etc.
It should be noted that the requirements as to electronic filing of
financial statements according to the new XBRL reporting standard
with the Danish Commerce and Companies Agency will begin to be
All internal reporting
preparation is automated
All internal reporting
preparation and distribution is automated
4
Medium performers
5
Low performers
implemented as from the calendar year 2012 3 for Danish class B
entities (small) and class C entities (large and medium-sized).
Electronic filing according to a pre-defined framework will inherently entail limitations as to how differently annual reports can be
presented. Consequently, the degree of automation of the external
reporting must be expected to play an even greater role in future.
No date has yet been set for XBRL filing for Danish IFRS-reporting
entities 4(listed companies, etc.).
Integrate internal controls and remember all stakeholders
The inherent risk relating to manual processes in both internal and external reporting should be reduced
by implementing appropriate internal controls. Companies should draw up a detailed plan for the preparation of their reporting. Such a plan should include sufficient internal controls – e.g. in the form of approvals, reviews, analyses and number checks – and take into account all significant stakeholders involved in
the process.
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Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
5.4
Standardised processes and procedures
Figure 5.8 – Standardisation, updating and documentation of processes
and procedures for the entire population
The survey inquires about the respondents’ assessment of the
degree of standardisation of processes and procedures. Around
40% replied that the company’s finance department has a high
degree of standardisation in place – including continous updating
of processes and procedures, whereas around 16% have a very low
degree of standardisation of processes and procedures and, hence,
have processes and procedures that tend to be both inconsistent
and undocumented.
16%
40%
Standardised processes and procedures appear to have a significant impact on the companies’ reporting time as well. Thus, High
performers stand out significantly, revealing a much higher degree
of standardisation, documentation, updating and monitoring.
44%
No standardisation/
undocumented
Some standardisation
and documentation
High degree of standardisation
and documentation
Figure 5.9 – Degree of standardisation, updating and documentation of processes and procedures
Consistency and
documentation of
policies, processes
and procedures
Policies, processes and
procedures are inconsistent and undocumented
Policies, processes
and procedures are
documented but not
consistently applied in
practice
Standardised policies,
processes and procedures are documented
and adhered to
Policies, processes and
procedures are standardised, documented,
adhered to and regularly monitored
Policies, processes and
procedures are standardised, documented,
adhered to, enforced
by the system and
monitored by a Center
Of Excellence
1
2
3
4
5
Score
High performers
Medium performers
Low performers
Another interesting conclusion is that fewer than 25% of the
respondents have implemented a complete reporting calendar,
including both start and end times for the individual tasks and a
description of the mutual dependency of the tasks.
3
As for reporting class B entities this applies to all
annual reports with a balance sheet date which is 31
January 2012 or later, and it has been announced
that the deadline applicable to reporting class C entities will not lie before annual reports with a balance
sheet date which is 31 July 2012.
4
Regarding IFRS-reporting entities, the Danish Commerce and Companies Agency has announced that
the electronic filing requirement will not take effect
for annual reports with a balance sheet date which is
before 31 August 2013, which for most companies
will, in practice, be the calendar year 2013.
A reporting calendar is an indispensable management tool
The vast majority of companies can benefit from implementing a complete reporting calendar for the
purposes of both planning, execution and management of the financial reporting process. Such a calendar should contain both start and end times, the resources required for the activities and the mutual
dependencies of the tasks. Overview of the financial reporting process reduces inefficiency, enhances
cooperation and increases the reporting flow.
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5 Process
efficiency
Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske
virksomheder
5
Both a higher degree of automation and the use and documentation of standardised processes and procedures are important components in the companies’ desire to have a more efficient reporting
process. The analysis shows that automation reduces reporting
cycle time. There is also no doubt that updated, well-documented
and automated procedures reduce the dependency on key employees and ensure a higher reporting quality.
Figure 5.10 Number of FTEs involved in the financial reporting process
per one billion DKK of revenue
25
Number of FTEs
20
15
5.5
Number of FTEs
The need for employees who are involved in the financial reporting process varies a lot and is dependent on the complexity of the
company and the scope of internal and external reporting.
According to the analysis, the 20% of the respondents that have
the lowest relative number of employees involved in the financial
reporting process have three employees per one billion DKK of
revenue. The 20% of the companies which have the highest relative
number of employees involved in the financial reporting process
have 19 employees per one billion DKK of revenue. The median
Group has an average of eight employees.
Figure 5.10 shows the disparity in the relative number of employees directly involved in the financial reporting process.
10
5
0
Fastest 20%
Median
Slowest 20%
Figure 5.11 shows the average number of employees involved in
the financial reporting process broken down into High, Medium
and Low performers. The difference in reporting time cannot be
explained by a higher number of employees being available to
perform the tasks. On the contrary, High performers have significantly fewer employees per one billion DKK of revenue than Low
performers.
Figure 5.11 Number of FTEs involved in the preparation of both internal
and external reporting per one billion DKK of revenue
30
Number of FTEs
25
20
15
10
5
0
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High performers
Medium performers
Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
Low performers
5.6
Figure 5.13 Percentage of entries which were first time error-free
Financial entries
First, it should be noted that the response rate in this part of the
survey is significantly lower than in the rest of the survey. However,
since the results reveal the same trends as in the international
benchmarks, we believe that the trend displayed is based on adequate data.
The trend revealed by the analysis is that there is a big difference
between both the share of manual entries and the share of errors
corrected among the companies analysed. High performers have
considerably fewer manual entries, and their share of first time
error-free entries is higher than the rest of the population.
International benchmark
100%
DK
95%
90%
85%
80%
75%
High performers
Medium performers
Low performers
Figure 5.12 Percentage of manual entries
International benchmark
80%
DK
70%
60%
50%
Likewise, the number of error corrections can be essential to the
efficiency of the company’s financial reporting process. Often,
following up on and correcting errors consumes considerable
resources, which delays the entire process and makes the financial
reporting process less efficient.
40%
30%
20%
10%
0%
The number of manual entries often greatly impacts a company’s
reporting time since they are time- and resource-consuming.
Furthermore, they considerably increase the risk of error, which
results in a need for extra controls.
High performers
Medium performers
Low performers
Minimise manual entries and error corrections
Many companies can increase both the quality and the speed of the financial reporting process by
reducing the volume of manual entries and error corrections. Handling of master data and correct
recording of transactions at the first point of contact reduces resource requirements considerably. This
should be done by ensuring that the underlying processes – e.g. recording of purchase orders – have
been appropriately organised so that they meet the company’s reporting requirements and support
solid, preventive and detecting controls, which ensure the quality of the reporting.
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5 Process
efficiency
Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske
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Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
6
Ernst & Young’s 10 recommendations for
improved financial reporting
In light of the financial reporting process being one of the key elements in the transformation of the finance function from production of
financial reporting to analysis, we have identified 10 recommendations for improved financial reporting.
01
02
03
04
05
06
07
08
09
10
Implement a process for continuous
improvement of the financial reporting
process
Annually go through the existing financial reporting process in a structured and
systematic manner to ensure that the process is continuously optimised and that it is
coherent with the strategy of the finance department.
Focus on processes and IT systems – and
particularly on employees and change
management
Processes and IT systems are essential to the optimisation of the financial reporting
process, but change management is equally important and constitutes a great
opportunity to strengthen the performance culture in the finance department.
Assign ownership of the financial
reporting and manage it through a clear
division of roles and responsibilities
Ensure clear ownership of the reporting within the finance department, which should
be responsible for the entire financial reporting process. Ensure a clear, crossfunctional division of roles and responsibilities for all underlying activities.
Implement a complete and available
finance manual
All relevant information about the financial reporting process – including an overview
of accounting policies, chart of accounts, deadlines, roles and responsibilities as well
as the handling of master data – should be gathered in one place and be available to all
parties involved in the process.
Create a process for efficient resource and
skill management
Continuously re-assess the capacity utilisation during the reporting period so as to
avoid bottleneck problems and unutilised resources. Focus on staff development – both
in relation to skills and business understanding.
Standardise processes, procedures and
internal controls
Standardised processes, procedures and internal controls result in a better overview,
faster performance of tasks, higher quality, more uniform reporting, and reduced
dependency on individuals.
Implement a complete reporting calendar
and use it actively as a management tool
A complete reporting calendar including specific start and end times for the activities,
the resources required and mutual dependency of the tasks is an indispensable tool for
managing the process and implementing improvements.
Automate processes and procedures
Automation of existing processes in the form of IT integration or automation of manual
procedures and controls increases the speed of the process and reduces the risk of
financial reporting errors.
Reduce the risk associated with
spreadsheets
Reduce the risk through better use of reports in the ERP system and Business
Intelligence solutions or, alternatively, through the use of spreadsheet models that
have the necessary transparency, consistency and robustness.
Perform activities earlier
Some activities may be removed entirely from the financial reporting process and be
carried out on an ongoing basis, whereas other activities may be performed earlier
in the process. Accelerating activities helps avoid process delays and ensure timely
resolution of complex problems.
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Ernst & Young’s 10 irecommendations
on better
financial
reporting
Closing Excellence - En analyse af finansielle6rapporteringsprocesser
60 store og mellemstore
danske
virksomheder
7
Final remarks
Ernst & Young would like to thank the 60 companies who responded to our questionnaire and participated in the survey. We
are convinced that the analysis provides valuable insight into a
number of the practical issues facing large and medium-sized Danish companies in connection with their financial reporting process.
We further hope that the analysis may be a source of inspiration to
companies wishing to improve and enhance the efficiency of the
financial reporting process.
Please do not hesitate to contact us for a more detailed discussion
of the contents of the analysis specifically and the financial reporting process in general.
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Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
8
Ernst & Young contacts
Financial Accounting Advisory Services
Advisory Services
Niels-Jørgen Andersen
René Ravn Nielsen
Partner
Partner
+45 5158 2596
niels-joergen.andersen@dk.ey.com
+45 5158 2711
rene.ravn@dk.ey.com
Marlene Franke Mozer
Bo Johansen
Executive director
Executive director
+45 5158 2511
marlene.franke.mozer@dk.ey.com
+45 5158 2515
bo.johansen@dk.ey.com
Henrik Jürgensen
Manager
+45 5158 2889
henrik.jurgensen@dk.ey.com
About Ernst & Young Financial Accounting
Advisory Services
About Ernst & Young Advisory Services
We assist our clients with questions relating to all kinds of accounting issues, including assistance relating to optimisation
of the financial reporting process and assistance relating to
IFRS, the Danish Financial Statements Act and capital market
transactions. We convert technically complicated areas into
practical solutions that make the everyday life of our clients
easier.
Our approach is founded in our clients’ specific challenges
and we assist in realising measurable economic gains. In
close cooperation with our clients’ resources, we assist in
executing business-critical projects, always focusing on
implementation and ensuring ownership within operational
assistance, as well as internal change and transformation
processes.
Closing Excellence
Ernst & Young performs Closing Excellence projects with integrated teams from Advisory Services and Financial Accounting Advisory Services. Our clients appreciate that we join forces to add accounting, process, IT, project and change management skills, and
that we see their business and the optimisation of their financial reporting process from a variety of angles.
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8 Contact info
Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske virksomheder
Transformation from production to analysis and
optimisation of the financial reporting process
are changes calling for both extra resources and
practical experience in the short run.
Do you need help with the transformation?
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Closing Excellence - An analysis of the financial reporting process of 60 large and medium-sized Danish companies
Closing Excellence - En analyse af finansielle rapporteringsprocesser i 60 store og mellemstore danske virksomheder
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Ernst & Young
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About Ernst & Young
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transaction and advisory services. Worldwide,
our 152,000 people are united by our shared
values and an unwavering commitment to quality.
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form and is therefore intended for general guidance
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All Rights Reserved
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