The Financial Close Process:
Implications for Future
Research
Diane Janvrin (Iowa State University)
Maureen Mascha (University of Wisconsin – Oshkosh)
Why Financial Close Process Research?
“The economic volatility of the past few years has left
businesses hungering for more timely and uniform
financial information to help them react quickly to
fast-changing conditions.” Emily Chasan, Wall Street
Journal, 2012
“Finance organizations need to proactively manage
the challenges of data quality and prepare for the
upcoming regulatory requirements to avoid creating a
perfect storm for their financial close and
consolidation processes.” Raj Chhabra, Deliotte
Consulting Director, 2010
Financial Close Definition

routine process of completing the accounting cycle
and preparing internal and external reports
Financial Close Process
Evaluate &
Test
Controls
Aggregate
& Analyze
Results
Remediate
Controls
Report &
Disclose
Information
§302
Certification
Audit Opinion
Excel
Enter & Process
Transactions
E-mail
Word
Form
10-Q
10-K
ERP
Aggregate
Financial
Amounts
Review
Preliminary
Results
Excel
Perform
Final
Adjustments
E-mail
Word
Report &
Disclose
Information
Board
Book
Audit
Opinion??
Why is financial close process
important?

Recent economic volatility and increase in number of
restatements

Regulations (i.e., Sarbanes-Oxley, fair value accounting
standards, SEC’s XBRL mandate) increase period-end workload

Several recent SEC filings have significant control weaknesses
related to financial close process

Time needed to complete the financial close process = internal
information environment quality??
Our approach

Literature review to identify critical issues

Use results to develop field investigation
questions

Conduct field investigation with various
financial close participants

Analyze results

Develop future research recommendations
Four factors

Need to meet expectations

Collaboration between multiple participants

Estimation process

Ability to incorporate new regulations into financial
close process
Need to meet expectations
Companies often attempt to meet or beat analyst
expectations during financial close process

Expectation concerns are not limited to year-end
earnings

Collaboration between multiple
participants

Financial close process may be hidden-profile task
In hidden-profile tasks, teams using bulletin-board
computer-mediated communication tool may outperform
teams using chat tool or communicating face-to-face

Before collaboration technology can be effective,
participants need to accept the technology

Role ambiguity may impact participants’ willingness to
collaborate

Estimation process
Even small changes in management’s estimates can
trigger material misstatement

Estimates allow analysts to predict future year's
earnings, although they are less predictive of future cash
flows


Investors find ex post estimate analysis informative
Ability to incorporate new regulations
into the financial close process
Many new regulations balance need for
standardization with need for professional judgment

Technology may improve financial close process
timeliness

In-house processes may increase organizational
knowledge while outsourcing options may be cheaper

Field Investigation

To date, 10 firms ranging from small firms to Fortune
50 companies

Director of Financial Reporting / Controller

12 questions based on literature review

30 to 45 minutes
Need to meet expectations

Meeting report deadline dates is critical

Meeting target bottom line numbers varies
widely among firms

Companies that update forecast monthly tend
to face more target bottom line pressure
Collaboration between multiple
participants

Very important

Particularly for organizations with
decentralized accounting functions
Estimation process

Importance of estimation process varies
significantly

Internal controls over estimation process vary
widely

Some firms conduct detailed estimation
reviews prior to period end

Changes in estimates is often last-minute
change
Ability to incorporate new regulations
into the financial close process

Varies widely among firms

Often can delay and/or add stress to financial close
process

Firms have moved from outsourcing XBRL to internal
XBRL software (bolt-on)

XBRL tagging process no long delays financial close
process although several managers still question why
they need to tag financial statement values
Future Research Opportunities
Need to meet expectations
• Research has examined to some degree who
analysts and lenders form their early earnings
expectations (Beaver 1979; Kim and
Verrecchia 1991, 1997; Barron et al. 1998)
• Still opportunity to examine how expectations
impact management’s actions and
effectiveness and efficiency of financial close
process
Collaboration between multiple
participants

Collaboration involves performing hiddenprofile task

How can hidden-profile task research
improve collaboration between financial
close participants?
Estimation process
• Explore how time pressure impacts
effectiveness and efficiency of estimation
process
• Could ex post estimate analysis improve not
only period-end estimates but potentially
financial close process?
• How do improvements in technology and
documentation techniques affect estimate
accuracy?
Ability to incorporate new regulations
into the financial close process
• Limited research discussing how companies
incorporate new regulations into current close
process
• Examine when and how existing systems
need to be modified or if new systems need to
be developed to meet needs of new
regulations
• What impacts decision to move XBRL from
outsource to in-house? Why bolt-on rather
than integrated approach?
Summary

Financial close is important and potentially under-researched
topic

Important due to





Recent economic volatility
Increase in restatements
New regulations
Several recent SEC filings with significant financial close process control
weaknesses
Time needed to complete financial close process = internal information
environment quality
• Concentrate future research on factors impacting financial close
process




Meeting or beating management expectations
Collaboration – hidden profile task
New standards
Estimation process
Questions??
Benchmarks and Key Performance Indicators (KPIs) of
Financial Close Processa
Category
Costs
Quality
Timeliness
a
source: Clark 2010
Benchmarks
Cost of non-compliance/control failure
KPIs
Increase in number of non-recurring transactions
FTEs for close
New account requests
Finance as percent of revenue
Task re-work; supporting schedules
Audit fees as percent of revenue
Journal entries containing errors or requiring readjustment
Number of control remediations
Changes in policies/procedures
Auditor adjustments
Increase in issue escalations
Post-close adjustments
Increase/decrease in expected results (returns,
receivables, etc.)
Days to close
Increase in expected volumes (purchase orders,
invoices, paychecks, etc.)
Percent tasks late
Post cut-off transaction postings
Current days to close vs. previous days to close