Closer to excellence The Nordic Closing Excellence Survey 2015 takes a closer look at the financial closing processes of 146 Nordic companies. Find out what you can do to bring your company closer to an excellent financial closing process. Contents Welcome4 Executive summary 6 Why focus on Closing Excellence? 10 How fast are the fastest? 12 What does it take to become a high performer? 16 How do high performers manage their financial closing process? 21 How do high performers work with internal controls over the financial closing process? 29 How have high performers designed the IT setup that supports the financial closing process? 34 Survey methodology 38 How EY helps clients move closer to excellence 40 High performers spend five days or less on their monthly closing process | Welcome Welcome Niels-Jørgen Andersen Partner Nordic Head of Process Improvement Thomas Kühn Executive Director Danish Head of Process Improvement Closing the books is a core task of the finance function in almost all companies. The monthly management report provides key decision-makers with the information they need to analyze the performance for the business and make the right decisions. The financial closing process is therefore vital, not only because the quality of the management report is crucial, but also because the process itself often requires use of significant resources. At EY, our specialized teams have helped numerous companies improve both the speed and quality of their financial closing process. With this report, it is our aim to use that experience — combined with the large amount of data that we have gathered by interviewing 146 large Nordic companies — to contribute to the continued improvement of the financial closing process in Danish companies. Particularly, we wish to draw attention to what it is that high performers do in order to achieve excellence in their closing process. We hope you will find the report inspiring and informative. Henrik Jürgensen Senior Manager Closing Excellence Solution Leader Niels-Jørgen Andersen 4 | Nordic Closing Excellence Survey 2015 Thomas Kühn Henrik Jürgensen High performers… • spend five days or less on their monthly closing process • produce both internal and external financial reporting of a higher quality • are more confident in their own processes and create higher stakeholder confidence in their financial reporting • have gained a detailed understanding of their closing process and are constantly working to improve it • have a documented and detailed understanding of significant processes, enabling them to identify key risks and mitigating internal controls • have implemented and continuously monitor a groupwide closing calendar with supporting checklists • operate a well-functioning shared service center • have a higher degree of automated processes • have a higher degree of system integration, and one standard chart of accounts in place • implement group-wide materiality thresholds and adopt a risk-based approach to the closing process High performers? Throughout this survey report, we use the term ‘high performers’ to signify the companies with the overall best-inclass performance on their closing processes. Above, you see a list of characteristics of high performers, which gives an overview of areas that set high performers’ closing processes in a class of their own. These characteristics outline the basis for building excellent closing processes, which will be elaborated on in the following chapters. The discussion comprises how high performers manage financial closing processes, internal controls, and the IT setup. For insight into the methodology behind the collection and analysis of the survey data referred to in this report, see Survey methodology. This includes a walkthrough of the criteria used to identify the group of high performers. Executive summary | Executive summary With this publication, EY wishes to establish a baseline for excellence in the financial closing process. We aim to do this by analyzing the characteristics of companies that have achieved a fast and efficient closing process while retaining high quality in the reporting output. The report focuses on three major areas: • How high performing companies manage their financial closing process • How high performing companies work with internal controls over the financial closing process • How high performing companies have designed the IT setup that supports the closing process Most companies today focus on closing excellence for three reasons: • To achieve a fast and cost-efficient financial closing process • To ensure high-quality financial reporting free of material errors • To free up time for more value adding activities In fact, this is exactly what the high performers in this survey have been able to achieve. Nordic Closing Excellence Survey 2015 | 7 | Executive summary Main conclusions High performers spend considerably less time on their financial closing process. On average, they spend five working days in total to complete the management report, which is seven working days less than the population average. Time that can be spent on more value-adding activities. High performers are more confident in their financial reporting. Some of the reasons are that high performers have more focus on risk and materiality, a centralized setup that ensures a group-wide standardized approach, and a higher degree of automation and system integration. High performers not only produce higher quality reporting faster, they also achieve this while spending less resources on the finance function than the population average. High performers’ finance function costs account for approxi­ mate­ly 1.2% of their revenue, while the population average spends 1.4%. The message is clear — by striving to be a high performer, the reward will be a closing process that is faster, of higher quality, and more cost-efficient, resulting in an output which is more value-adding and better aligned with the company’s strategy. 8 | Nordic Closing Excellence Survey 2015 14 different industries 146 participants Denmark | Sweden Finland | Norway 14 of the companies on the Copenhagen Nasdaq OMX C20 index Survey facts The 146 survey participants range from mid-sized companies to some of the largest listed groups in the Nordics. Four countries, and 14 different industries are represented. Among participants are 14 of the companies on the Copenhagen Nasdaq OMX C20 index. Revenue (EURm) Number of reporting entities Ownership structure Number of FTEs 12% 12% 35% 41% 43% 52% 48% 24% 64% 53% 16% <500 500-5,000 >5,000 <15 15-30 >30 Listed Non-listed <250 250-1,000 >1,000 Why focus on Closing Excellence? | Why focus on Closing Excellence? When we talk to our clients about the role of the finance function, it is clear that this has been undergoing significant changes in recent years. The finance function is expected to be focusing on value-adding, business supporting activities, while still maintaining high quality in the reported historical figures. This development has had a profound impact on the financial closing process. Figure 1.1 Most companies want to spend less time producing financial reporting and more time analyzing it. Analysis Control Production Analysis Control Production In our experience, the main purpose of many companies’ financial closing process has been the production of financial data, i.e. getting the numbers finalized. The main part of the closing process has been spent on the mechanics of closing the business units and consolidating the figures from a group perspective. Financial controllers are actually in many cases deeply involved in the production of financial data, and we often see group controllers whose main focus is helping the business units close their books. The value adding business controlling that provides input into what the numbers say about the development of the business is often sacrificed, as the finance function scrambles to finalize the management report on time. While the finance function is obviously still expected to produce high quality historical financial data, the development described above has created an everincreasing pressure to expand the scope and quality of the business analysis. CFOs are expected to provide the business with the ability to understand the reality underlying the financial figures, explain significant developments, and help CEOs and other business leaders understand the strategic implications of changes to the business environment. This change — as well as constant demands for high quality financial reporting free of material errors — requires focus on the closing process, because optimizing this process frees up time and resources from production to analysis and eliminates the sources of errors in the process. Nordic Closing Excellence Survey 2015 | 11 How fast are the fastest? | How fast are the fastest? When analyzing the financial closing process, we divide it into four steps in order to create some structure to the analysis (see Figure 2.1). The four steps present different challenges to companies. When closing business units, many companies struggle to ensure a standardized approach. Therefore, centralization (or the lack thereof) becomes an important issue. The challenges in connection with consolidation often relate to IT and automation, as well as low quality reporting from local business units. Preparation of reports – both internal and external – often relies heavily on manual procedures and is dependent on key personnel. Figure 2.1 The phases of the financial closing process Closing of local business units Management report Consolidation External report The difference is quite significant between how quickly the group of high performers and the rest of the population, respectively, go through the steps. In the following pages, we discuss how high performers approach the closing process, but first let us take an overall look at the cycle times. As is evident from Figure 2.2 on the next page, the average high performer delivers a finalized management report after approximately five working days. The process involves closing local business units in three working days, before spending approximately one working day consolidating, and one working day preparing the management report. In contrast, the population average spends a total of 12 working days. A striking observation is that high performers have finalized their management report well before the population average have closed their local business units. Nordic Closing Excellence Survey 2015 | 13 | How fast are the fastest? Figure 2.2 Monthly reporting 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 High performers Population average Closing of local business units Consolidation Management report In other words, high performers gain seven working days each month, which can be spent on forward-looking and more value-adding activities. Furthermore, high performers get the numbers early, allowing them to react much quicker to significant developments. In slower reporting companies, we often see the need to produce ad hoc reports to management, because they need information and key numbers. This has several undesirable consequences. First, the preparation of extra reports increases the amount of work and takes resources away from the full-scope management report as well as other important tasks. Second, the level of internal controls over ad hoc reports is often lower, resulting in more errors and less management confidence in the reporting. Third, when the fullscope report arrives, the information is outdated and has lost its relevance. These trends reveal themselves again when we look at the quarterly and annual closing process (Figures 2.3 and 2.4): Figure 2.3 Quarterly reporting 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 High performers Population average 14 | Nordic Closing Excellence Survey 2015 Closing of local business units Management report Consolidation External report | How fast are the fastest? Figure 2.4 Annual reporting 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 High performers High performers Population average Population average Closing of local business units Consolidation Management report External report In our experience, the main aspect that high performing companies approach differently is that they manage the closing process more efficiently, whereas average performing companies have a much more ad hoc and unstructured approach to closing the books. High performers: • know what has to happen — and when — in order for the process to work • have reduced and eliminated redundant tasks • have established clear roles and responsibilities • have analyzed and understood the connection between the process and the IT setup • have adopted a risk- and materiality-based approach ensuring that internal controls are focused on material risks and do not slow down the process unnecessarily. The average high performer delivers a finalized management report after approximately five working days Nordic Closing Excellence Survey 2015 | 15 What does it take to become a high performer? | What does it take to become a high performer? Reporting in five days or less is impressive, but what is it that high performers have done that enables them to produce management reporting so fast? And is fast reporting achieved at the expense of quality? We will now turn our attention to answering these important questions. The following sections will discuss how high performers have prioritized their efforts in order to achieve an excellent financial closing process, internal controls and IT setup. We have analyzed the results and added our extensive experience from partnering with some of the largest Nordic companies on developing excellent closing processes. Nordic Closing Excellence Survey 2015 | 17 High performers spend 1.2% of revenue on their finance function …the population average spends 1.4% High performers from EY APQC Global Benchmark only spend 0.8% This is an average saving of EUR 5.8 million every year | What does it take to become a high performer? | How do high performers manage their financial closing process? How do high performers manage their financial closing process? In the following section, we look at how high performers have designed their closing process to facilitate fast reporting while maintaining high-quality output. We have analyzed the survey data from three different angles to convey an understanding of some of the key areas that high performers have addressed: 1.Quality in output 2.Centralization of the reporting setup 3.Standardization of processes Figure 3.1.1 Confidence in management reporting Quality in output Intuitively, it would make sense to think that faster reporting leads to lower quality. All other things being equal, less time to produce the output means less time for performing the mechanics of compiling the data, financial controlling and analysis of the figures. In our experience, however, the correlation is actually the opposite. The fast reporting companies that we have worked with over the years tend to have higher quality reporting than their peers. The survey data supports this, as is evident from figure 3.1.1. Recall that high performers prepare their management report in seven working days less than the population average. Nonetheless, they are actually more confident in the quality of the reporting than the rest of the survey population. So, the survey data suggests that it is possible to significantly speed up the process and actually increase quality at the same time — an observation that is completely in line with what we see when working with our clients. High performers succeed in producing higher quality in less time through a number of different measures, but let us start by looking at the contents of the management report. Important aspects of reporting quality are reporting content, focus, and scope. To a larger extent than the population average, high performers have designed both a management report and an external report (quarterly and annual), which reflect the strategy and related KPIs of the company, as is evident from figure 3.1.2 on next page. Best in class 5 4 3 2 1 Worst in class High performers Population average Nordic Closing Excellence Survey 2015 | 21 | What does it take to become a high performer? | How do high performers manage their financial closing process? Figure 3.1.2 The degree to which the companies strategic KPIs are reflected in the reporting Management report Excellent 5 4 3 2 1 Poor Excellent 5 External report 4 3 In our experience, it is a very common issue that the contents of the management report have not been aligned with the company’s strategy. This often leads to the management report missing the mark in terms of delivering the value that stakeholders require, both because it contains information that is not strategically significant to management, and because there may be important information which is not contained in the report. Not only does this diminish the value of the management report, it also means that resources and time are spent to produce information that does not bring sufficient value to management. In our experience, many companies can benefit substantially from re-designing their management report. Ensuring that (only) strategically important KPIs are included improves the report’s value to its readers — and removing non-essential data may drastically diminish the size and scope of the management report, freeing up time and resources. Our experience is that many companies produce management reports that contain too much information, are too unfocused, and simply too large to be of real value. High performers have to a larger extent addressed this issue, resulting in higher quality and a more efficient process. 2 1 Poor High performers Population average 22 | Nordic Closing Excellence Survey 2015 Centralization of the reporting setup The benefits of centralizing key processes are many. Centralization provides the opportunity to develop highly specialized employees, because the transaction volume at the centralized location is much higher. Centralization also makes it easier to develop a standardized approach and to effectively roll out standard, group-wide policies due to the higher degree of control that group finance has over a centralized process. Finally, centralization often provides cost-saving opportunities due to economies of scale. In our experience, centralization actually is an important prerequisite for a fast close, but note that we have also seen plenty of examples of unsuccessful centralization efforts. If companies are to reap the benefits inherent in a centralized reporting setup, the process of centralizing must be carefully planned and executed. High performers are more confident in their financial reporting | What does it take to become a high performer? | How do high performers manage their financial closing process? Figure 3.1.3 Use of shared service center 100% 52% High performers Population average A common way of achieving centralization is through the establishment of a shared service center. In our experience, many companies have reaped significant benefits from a shared service center setup. One area where high performers differentiate themselves from the population average is that they — to a much larger extent — have a shared service center in place (see figure 3.1.3), which manages three or more processes (see figure 3.1.4). Again, the data supports our assumption that operating an efficient shared service center is an important prerequisite for excellence. In our experience, efficient and effective use of a shared service center requires the existence of well-documented processes, continuous evaluation of the quality of output from the shared service center, and group-wide accounting and controlling policies. The processes that are most often managed by a shared service center are accounts payable, cash, accounts receivable, and intercompany (see figure 3.1.5). Centralization — along with standardization and automation, both of which are covered in the following pages — is one of the pillars upon which an excellent financial closing process can be built. But it is important to understand that centralizing key processes requires a structured, meticulously planned, and well-executed approach if it is to succeed. Figure 3.1.4 Number of processes managed by shared service center Figure 3.1.5 Processes managed by financial shared service center by rank (high performers) High performers Population average >6 Accounts payable Cash Accounts receivable Intercompany Inventories 3-6 Revenue Salaries Controlling Project accounting <3 Other 0 20 40 60 80 100 % 24 | Nordic Closing Excellence Survey 2015 0 20 40 60 80 % 100 All high performers have a shared service center in place | What does it take to become a high performer? | How do high performers manage their financial closing process? Standardization of processes Ensuring a standardized execution is integral to achieving excellence in the closing process. In our experience, the group finance function must assume ownership of the financial closing process (and other related financial processes) in order to ensure a group-wide standard quality in the execution. Lack of standardization leads to numerous issues that stem from inconsistent application of accounting policies, different views of the level of quality required in the reporting, lack of consensus regarding materiality levels etc. In our view, a common, group-wide understanding of the closing process and its components is essential when companies wish to improve their financial closing process. A key area lies in developing and continuously maintaining process documentation in the form of flow charts and process descriptions (an area covered in the chapter “How do high performers work with internal controls over the financial closing process?”). Other key areas include creating a high level overview of the entire process (a group-wide closing calendar), constantly monitoring progress and ensuring that the process is continuously improved. As is evident from figure 3.1.6, our survey shows that high performers generally have a higher degree of standardization of their processes. Most companies in the survey — both high performers and the population average — have a standard group-wide chart of accounts in place, with the high performers scoring a little higher. One standard chart of accounts — at least in all material entities — lays the groundwork for adopting a standardized approach and facilitates the application of uniform group accounting policies, and not least uniform booking of intercompany transactions (minimizing the need for intercompany reconciliations). Having a formal checklist of all key tasks in place as well as defining and communicating materiality levels for the purpose of group reporting are two key components of an efficient financial closing process. As can be seen from figure 3.1.6, high performers score significantly higher on these two parameters. 26 | Nordic Closing Excellence Survey 2015 | What does it take to become a high performer? | How do high performers manage their financial closing process? Figure 3.1.6 Level of standardization in the financial closing process All reporting entities use a standard chart of accounts Standard reporting package utilized by all reporting entities Formal closing checklist outlining the key activities in place Defined and implemented materiality levels % 0 20 40 60 80 100 High performers Population average Most companies have checklists, but in our experience, the quality differs greatly. Knowing which tasks are to be performed by whom — and what the deadline is — is of course essential. But companies which also know how long the different tasks are expected to take, when they are to be initiated, and how they interact with each other are generally in a much better position to close fast and continuously improve the process. In our experience, many companies struggle with materiality levels, and as figure 3.1.6 shows, this is one area where high performers really stand out. Establishing consensus regarding materiality thresholds ensures that the resources applied to the closing process are spent on the specific issues that are material, and frees up time to focus on complex accounting problems, rather than issues of little or no significance. Ensuring a standardized execution is integral to achieving excellence in the closing process Nordic Closing Excellence Survey 2015 | 27 | What does it take to become a high performer? | How do high performers manage their financial closing process? What can you do? The key to improving your company’s financial closing process without having to spend excessive time and resources lies in correct scoping of the approach. In our experience, successful improvement projects start with identifying the specific areas that can yield the greatest benefits — and analyzing the costs (in terms of internal hours, IT upgrades, and external assistance) associated with identifying and implementing the improvements. Plan the project well, set realistic targets, and — crucially — focus on involving key players in the financial closing process to ensure that ownership of the solutions are embedded in the organization. We have helped numerous clients harvest low-hanging fruits and achieve significant and lasting results through a fourphase approach: 1 2 4 3 Perform rapid assessment. Perform a rapid assessment of the current state. Focus on areas that are time-consuming and where errors occur. Use the rapid assessment to focus your future efforts on the issues that really matter. In our experience, most companies can get an overview of their challenges in a week or less if the approach is planned and executed well. Implement improvements. Prepare an implementation plan that describes what needs to be done, who is responsible for doing it, and what the deadlines are. As implementation unfolds, continuously monitor progress and adjust the approach when necessary. 28 | Nordic Closing Excellence Survey 2015 Prepare project plan. Based on the rapid assessment, scope and plan your project. Focus on low-hanging fruits (i.e. improvements with a large impact at a low cost). Identify the specific process owners and other key personnel that need to be involved in order to identify critical issues and develop solutions. Execute plan. Interview process owners and key personnel to understand current processes in sufficient detail, get their input on improvement opportunities, and prioritize these improvements. Based on the information gathered on current processes and the planned improvements, design the future process. When identifying issues, focus on eliminating redundant tasks, moving nonvalue-adding tasks out of the closing process, implementing materiality thresholds, and making better use of the existing IT setup. | What does it take to become a high performer? | How do high performers work with internal controls over the financial closing process? How do high performers work with internal controls over the financial closing process? A solid internal control environment not only leads to more confidence in the numbers, but also implies less time spent to get there. A highly automated internal control environment with a predominance of preventive controls is strived for by many companies. The overall conclusion based on the survey results is that there is plenty of room for improvement within the internal controls environment. Especially when it comes to automated controls supported by IT systems, as well as the degree of preventive controls, all participants — including high performers — have great potential for improvement. Figure 3.2.1 Companies with detailed process descriptions and flowcharts Figure 3.2.2 Frequency of companies’ review of their process descriptions and flowcharts in place The survey shows that high performers more often have detailed process descriptions and flowcharts in place — a fact that applies to almost all high performers (Figure 3.2.1). However, when it comes to keeping these process descriptions and flowcharts up-to-date, less than half of all participants review them once a year or more frequently (see figure 3.2.2). Failure to continuously update process descriptions means that these will often be outdated and viewed as irrelevant by the employees, who are supposed to use them. Understanding Multiple times per year 92% 72% Once per year In case of significant changes High performers Population average Rarely High performers Population average % 0 20 40 60 80 100 Nordic Closing Excellence Survey 2015 | 29 | What does it take to become a high performer? | How do high performers work with internal controls over the financial closing process? Figure 3.2.3 Companies with a Risk and Control Matrix in place processes is key to understanding the risks of material misstatements in the financial reporting. Thus, out-of-date process descriptions also mean that the company’s mapping of risks is out-of-date. 67% 57% High performers Population average Figure 3.2.4 Extent to which controls are preventive (as opposed to detective) 33% 26% High performers Population average Figure 3.2.5 Controls automated and supported by IT systems Best in class 5 4 3 2 1 Worst in class High performers Population average 30 | Nordic Closing Excellence Survey 2015 In addition to this, the survey shows that the majority of high performers have a Risk and Control Matrix in place (Figure 3.2.3). The Risk and Control Matrix is a key tool allowing the company to manage best-in-class internal controls. It brings clarity and overview, focuses on areas with risks, and ensures a robust control environment with just the right level of controls. As for the design of the controls, the survey shows that most companies have a majority of detective controls (Figure 3.2.4). This applies to both high performers and the population average, and is in line with the finding that companies only have limited automation and IT support for internal controls (Figure 3.2.5). In our experience, there is a strong correlation between having a high degree of automated controls and having mostly preventive controls. When controls are performed outside the systems, the tendency is that they are mostly detective. An important part of achieving an excellent internal control environment is to use a risk- and materiality-based approach. In our experience, an excellent internal control setup starts with an excellent — and continuously updated — understanding of the financial processes in general and the closing process specifically. This approach will ensure that all significant risks are identified and it subsequently enables the design of controls to mitigate the risks. | What does it take to become a high performer? | How do high performers work with internal controls over the financial closing process? What can you do? Having an optimized internal controls setup in place not only reduces the risk of material errors in the reporting to an acceptable level, it also plays a big part in closing the books more efficiently and faster. Below, we have listed four critical areas to focus on when working on optimizing the internal controls: 1 2 4 3 Prepare a Risk and Control Matrix. The Risk and Control Matrix provides an overview of the internal controls and their relation to key risks in the financial processes. In order to get the most out of the Risk and Control Matrix, it is critical that the Risk and Control Matrix: • is based on an updated and documented understanding of your company’s current processes and related risks • is continuously updated to reflect changes in processes and related risks • is prepared based on well-defined, group-wide materiality thresholds ensuring that internal controls target and mitigate only material risks. Monitor your controls. Continuous monitoring of the processes, risks, and related controls is a key aspect of an efficient and effective internal control setup. One option is to implement IT supported monitoring of risks and controls (GRC systems), but many companies run efficient monitoring without such systems. A key aspect of control monitoring is to ensure that group controllers’ and internal audit’s site visits include evaluation of whether the controls documented in the Risk and Control Matrix are performed as prescribed. Getting the balance right between self-assessment and actual testing of controls is also a key aspect in order to maintain a high-quality internal control setup at a reasonable cost. Bring your controls to life. Listing your internal controls in the Risk and Control Matrix is a good starting point. However, ensuring that they are actually carried out is of course a necessary second step. Your internal controls should be imbedded in documentation and guidance used in day-to-day activities, such as process documentation, standard operating procedures, and service level agreements with shared service centers and outsourcing partners. Automate your controls. To the highest extent possible, ensure that controls are supported by IT and automated. Therefore, perform an analysis to understand the correlation between your processes, controls, and IT setup to take maximum advantage of automation possibilities. Pay particular attention to how you can utilize the functionality in your ERP system to support automated controls. Nordic Closing Excellence Survey 2015 | 31 Surprisingly, half of the high performers do not formally test their controls | What does it take to become a high performer? | How have high performers designed the IT setup that supports the financial closing process? One set of numbers, one truth How have high performers designed the IT setup that supports the financial closing process? When we talk to clients about their financial closing process, IT is often a source of frustration. When asked about the main internal challenges associated with the financial closing process, half of all participants point to inefficient processes (Figure 3.3.1). However, while half of the population average also mentions poor IT alignment as a major challenge, only a third of the high performers share this view. Let us look at what drives this difference. High performers’ IT setup is characterized by a higher degree of system integration. This is supported by the fact that the majority of high performers have one main integrated system (Figure 3.3.2). They have newer and more updated versions of their ERP systems (Figure 3.3.3), which is a consequence of increased focus on IT infrastructure planning. In addition to high performers having more updated ERP systems, they are also more satisfied with how these systems support finance processes. In combination with their consolidation systems, these ERP systems simply better fulfil high performers’ needs (Figures 3.3.4). Figure 3.3.1 Main internal challenges associated with financial reporting Inefficient processes (Manual routines) IT (Poor alignment between financial processes and supporting IT infrastructure) Organizational issues (Complexity, unclear roles within finance) There are no internal challenges with the financial reporting Mismatch between reporting requirements and reporting setup Insufficient time/resources (Tight deadlines) Lack of competences High performers Population average Other % 0 34 | Nordic Closing Excellence Survey 2015 20 40 60 80 100 | What does it take to become a high performer? | How have high performers designed the IT setup that supports the financial closing process? Figure 3.3.2 ERP system structure One integrated system across all reporting entities One integrated system, but local installations Different ERP systems across local entities/reporting entities High performers Population average Other % 0 High performers Population average 60 80 100 Figures 3.3.4 Satisfaction with IT setup Excellent 5 4 3 2 1 Poor Excellent 5 4 3 2 1 Poor Consolidation system fulfills needs 5 years old ERP system fullfills needs 3 years old 40 Having one group-wide integrated ERP system can help the finance function accomplish a faster closing of business units and consolidation, while reducing iterations substantially. But there are other benefits to be derived. The ERP system can help support the internal control environment by enabling the use of a higher degree of preventive controls, which directly leads to higher confidence in the numbers. Regardless of organizational area, business management is carried out based on the same numbers. This eliminates discussions and errors and creates one set of numbers, one truth. As one main ERP system holds many advantages, it also makes it easier to standardize and optimize across borders, while enabling up- and down-scaling according to the company’s needs. System and IT integration Figure 3.3.3 Age of ERP systems 20 Excellent 5 4 3 2 1 Poor High performers Population average Nordic Closing Excellence Survey 2015 | 35 75% of high performers have a plan for how the IT architecture of their finance function should look in three years Only 52% of the population average have such a plan | What does it take to become a high performer? | How have high performers designed the IT setup that supports the financial closing process? What can you do? IT infrastructure, including the ERP setup, plays a big part in achieving an excellent closing process, but even companies that are not on the verge of investing heavily in IT systems and ERP setups can probably identify many low-hanging fruits to pick. It is our experience that the functionalities in companies’ existing ERP system are often not fully utilized — and that the setup is not aligned with the financial processes it is supposed to support. Below, we have listed three issues that companies can address to ensure better IT support of the financial closing process. 1 Utilize your existing IT setup better. In our experience, the majority of companies can greatly improve their financial closing process by making better use of functionality already available in their existing ERP system. When working on improvements in this area, ensure that you involve finance, process, and IT personnel in developing solutions, so that all aspects are covered. This approach facilitates solutions that increase integration between systems, automate controls, and improve utilization of IT systems in place. 2 Prepare a finance/IT roadmap. Ensuring that the strategies for IT and finance are aligned is critical in order to build an efficient and effective approach and identify future automation and integration possibilities. 3 Manage the risks associated with spreadsheets. Everyone uses Excel, because it is versatile and easy to use. However, the use of Excel should be governed by policies for how Excel models are designed and documented in order to minimize the risks associated with these models. Particular attention should be given to those Excel models that actually generate accounting figures. To the greatest extent possible, ensure that such models are reduced and/or eliminated, so that accounting figures are generated in source systems and/or ERP systems, rather than in Excel. Models used to analyze data should be designed according to structural guidelines separating input of data from calculations and output, and the models should be documented and transparent. Nordic Closing Excellence Survey 2015 | 37 Survey methodology | Survey methodology Who participated in the survey? The 146 survey participants range from mid-sized companies to some of the largest listed groups in the Nordics. Four countries and more than 14 different industries are represented. Among participants are 14 of the companies on the Copenhagen Nasdaq OMX C20 Index. Below, you see illustrations of how the entire group of 146 survey participants can be described in terms of revenue, number of reporting entities, ownership structure and number of FTEs: Revenue (EURm) Number of reporting entities 12% 35% 41% 53% 43% 16% <500 500-5,000 >5,000 Ownership structure <15 15-30 >30 Number of FTEs 12% 52% 48% 24% 64% Listed Non-listed <250 250-1,000 >1,000 To illustrate clearly how high performers manage their financial closing process differently from other companies, we divided the survey participants into groups of ‘high performers’ and ‘population average’. How was the group of high performers determined? To be included in the group of high performers in this report, companies had to live up to the following criteria: • The company had to be among the fastest 10% of all participants, measured on working days spent on monthly reporting (Number of working days for Closing of Business Units + Consolidation + Preparation of Management Report) • The company had to have revenue exceeding EUR 500m • The company had to have at least five reporting entities • The company had to prepare a consolidation, as well as a management report on a monthly basis Nordic Closing Excellence Survey 2015 | 39 How EY helps clients move closer to excellence | How EY helps clients move closer to excellence At EY, we have many years of experience helping a wide range of Danish and international companies improve their financial processes in general, and the closing process specifically. Our Financial Accounting Advisory Services (FAAS) team includes specialists within financial process improvement, ERP systems optimization, and internal controls improvement. FAAS is committed to playing our part in improving the financial closing process of Danish companies. Closing Excellence. We work with our clients to improve all aspects of their financial closing process. This includes reducing the time spent on closing local business units, consolidation and preparation of the internal and/or external reporting. We help clients reduce errors, close faster, and improve the quality of their management reporting. Rapid assessment / Diagnostics. Using our tried and tested methodology, we provide our clients with a quantitative and qualitative assessment of the potential for improvements in their closing process. We engage with main stakeholders to build a framework for significant lasting and value-adding changes. ERP / Digital Services. We partner with the client to ensure proper utilization of their current or future finance systems. We ensure that the automation opportunities inherent in their systems are fully utilized, we help establish data transparency and clarity in order to improve speed and quality, and we assist our clients establish “one set of numbers”. Internal controls optimization. We help our clients optimize their internal controls over the financial closing process by ensuring that the control framework is based on a solid understanding of the industry, the current financial processes and the associated risks. We work with our clients to ensure firmly established roles and responsibilities throughout the process to minimize redundancy and focus on risk and materiality. Project management. When delivering Closing Excellence projects, our FAAS team gives our clients the benefits of a wide array of state-of-the-art tools and templates. Combined with our industry-leading methodology, this gives our clients efficient and fast results through a structured, tailor-made approach. Change management. Closing Excellence projects are first and foremost about people. We ensure that all major stakeholders are involved in the improvement process so that the changes are embedded in the organization. This way, great ideas become lasting, self-sustaining improvements. 42 | Nordic Closing Excellence Survey 2015 | Our team About FAAS Denmark At EY’s Financial Accounting Advisory Services (FAAS), we help our clients with all types of financial reporting related issues, including optimization of our clients’ financial closing process, as well as GAAP assistance and enhancement of the annual report. We translate a technically complicated field into practical solutions, making daily working life easier for our clients. About Closing Excellence In Closing Excellence projects, our clients appreciate that we bring specialized skills within accounting, process optimization, internal controls, IT, project and change management. What makes a difference to our clients is that our projects yield tangible, lasting results that are embedded in our clients’ organizations. FAAS Closing Excellence contacts Niels-Jørgen Andersen Thomas Kühn +45 5158 2596 Niels-Joergen.Andersen@dk.ey.com +45 5158 2721 Thomas.Kuehn@dk.ey.com Henrik Jürgensen Gert Andersen +45 5158 2889 Henrik.Jurgensen@dk.ey.com +45 2220 2363 Gert.Andersen@dk.ey.com Alex Blicher Hansen Casper Kjær Andersen +45 3078 2070 Alex.Blicher.Hansen@dk.ey.com +45 3078 2147 Casper.K.Andersen@dk.ey.com Jonas Bank Anders Laurup Petersen +45 2529 4208 Jonas.Bank@dk.ey.com +45 2529 3268 Anders.L.Petersen@dk.ey.com Mark Blauenfeldt Nissen Annemette Mortensen +45 5158 2861 Mark.Nissen@dk.ey.com +45 2529 3348 Annemette.Mortensen@dk.ey.com Partner Nordic Head of Process Improvement Senior Manager Closing Excellence Solution Leader We help companies make better decisions by partnering with them to develop best-inclass financial reporting Manager Manager Senior Consultant Executive Director Danish Head of Process Improvement Executive Director Head of ERP / Digital Services Manager Manager Senior Consultant Nordic Closing Excellence Survey 2015 | 4 EY | Assurance | Tax | Transactions | Advisory About Ernst & Young EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. About EY’s Financial Accounting Advisory Services The changing accounting and reporting landscape provides challenges for multi-national companies as they seek to respond to global market conditions and report on their financial results while facing increased scrutiny from a range of stakeholders. EY’s accounting, regulatory, compliance and IT professionals combine technical expertise with business and industry insights to help clients navigate complexity. Whether your focus is on managing highly technical accounting requirements or addressing governance and regulatory issues, having the right advisors on your side can make all the difference. Our team uses proven and integrated methodologies to help you solve your challenging business problems, deliver accurate financial reports in complex market conditions and make improvements sustainable for the longer term. We understand that you need services that are adapted to your specific industry issues, so we bring our broad sector experience and deep subject matter knowledge to your projects in a proactive and objective way. © 2015 Ernst & Young P/S, CVR No 30700228 All Rights Reserved. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/dk B15035