The Financial Close Process:
Implications for Future
Research
Diane Janvrin (Iowa State University)
Maureen Mascha (Purdue University-Calumet)
“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
Outline

Introduction

Motivation

Method

Results

Summary
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 has increased pressure on companies to timely
report performance
Regulations (i.e., Sarbanes-Oxley, fair value accounting
standards, SEC’s XBRL mandate) have increased accountants’
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 financial close
participants from various organizations

Analyze results

Develop future research recommendations
Four factors

Need to meet expectations

Collaboration between multiple participants

Estimation process

Ability to incorporate new regulations into the financial
close process
Need to meet expectations
Companies often attempt to meet or beat analyst
expectations during the 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/ collaboration may improve MFM

In-house processes may increase organizational
knowledge while outsourcing options may be cheaper

Field Investigation

To date, 12 firms ranging from small firms to Fortune
50 companies; private to public

Director of Financial Reporting / Controller

12 questions based on literature review

30 to 45 minutes
Findings: 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

Accuracy and timeliness are often equally
important
Findings: Collaboration between
multiple participants

Very important; particularly for organizations
with decentralized accounting functions
Findings: 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

Adjustments not always made at month-end
for errors– sometimes made at quarter-end
Findings: 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
SOX generally integrated within systems
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
Future Research Opportunities:
Collaboration between multiple participants
Since financial close process involves close
collaboration among multiple participants
performing hidden-profile task,
 consider how hidden-profile task research
may assist in examining how to improve
collaboration between financial close
participants
 examine how software may assist in
collaboration efforts
Future Research Opportunities:
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?
Future Research Opportunities: 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 the 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 underresearched topic

Recent economic volatility, increase in restatements
has increased pressure on companies to timely report
performance

New regulations have increased accountants’ periodend workload

Several recent SEC filings have significant control
weaknesses related to financial close process

Academic research now uses time needed to
complete financial close process as proxy for internal
information environment quality
Summary
Future research is needed regarding the
following factors impacting the financial close
process




meeting or beating management expectations
collaboration – hidden profile task
new standards
estimates
Questions??