As business globalises, compliance with a host of international regulations is becoming more and more onerous—and the consequences of non-compliance more severe. It’s time to start thinking about automating the financial reporting process.
By Conrad Steyn, Director, Barnstone and Trintech Alliance Manager (Sub Saharan Africa)
Reporting financial results is a traditionally critical process for any company—after all, it’s on these figures that the market will base its investment decisions. These figures must be delivered in compliance with the standards of the authorities in the countries where the company reports.
Clearly, compiling financial results is important; more than that, there are severe consequences for getting it wrong. Aside from the considerable embarrassment, fines for non-compliance are levied and inaccurate reporting can even get companies delisted from important stock or commodity exchanges. Having to restate results can also make getting loans more expensive. Research by Financial Week suggests that restatements typically cost a company an average of 69 additional basis points on a loan—that’s an additional R1-million in annual repayments on a loan of R100-million.
Despite its importance, the reporting of financial results has typically not yet benefitted from the wave of automation that is transforming the finance function as a whole, perhaps because the team is relatively small in size. As a result, the processes remain manual: data is hard to gather and verify, and there is no audit trail. Because it’s not automated, the process is highly dependent on people. Aside from a lack of standards, this dependence constitutes a risk as the company is vulnerable if a key team member is ill or resigns—and if the regulations change, which they do constantly.
Errors and their consequences
The end result is that errors are very likely to creep in, with the potentially severe consequences outlined above. These factors alone make a good case for considering the automation of the process—but three further factors must also be considered.
The first is that as global businesses adopt shared services and/or outsourcing to achieve efficiencies and save costs, they are stretching the manual reporting process to breaking point. Approaches that are more standardised and automated are the only solution.
Second, regulation is increasing and the various standards are starting to converge. For example, the implementation of International Financial Reporting Standards (IFRS) will affect reporting requirements—and financial reporting teams will need significant training.
And, third, it seems likely that XBRL (extensible business reporting language) is becoming more prevalent. XBRL is a technical standard for the description of financial and related data, providing a means to assign standard data tags to data in financial reports and systems. The SEC is rolling out XBRL compliance to all companies that report to it, a trend which may affect other jurisdictions.
Creating a business case for automation
Barnstone advises companies to understand the regulatory changes that apply to them and to consider a business case for automation. To get an idea of the people, processes and costs associated with the function, track everything connected with the next reporting cycle, including the external audit fees. Once this has been done, develop a forward-looking plan, including the supporting business case to acquire the skills, tools and partnerships that will be required.
It can be helpful to apply a production mindset to the reporting process, and set benchmarks for performance. It’s then possible to work towards a future state based on realistic savings over time. For example, automating the financial reporting process can result in significant savings in man hours especially from year two. These savings are generally not related to reduced headcount but to lowered consulting and overtime costs, or transfer of costs to other deferred projects.
Technology can support workflow, roll forwards, updating, document distribution, cross checking and process documentation. It makes it easy to create a system of record that is easily updated and has audit trails, reducing the risk of personnel change. It also enables one to create processes that clear bottlenecks, allowing technology to manage the mundane and routine tasks.
Accessing best practice
Working with an established vendor in this area can have significant benefits through access to global experience and best practice. At Barnstone, we work with Trintech, which coined the phrase “last mile of finance” to describe the financial closing process. It has developed an integrated platform to assist CFOs meet this important obligation much more accurately but without consuming excessive resources. This last point is particularly important when one considers the increasingly strategic role that finance generally, and the CFO in particular, are being asked to play in the business as a whole.
In particular, new research from Accenture shows that finance functions are being asked to focus more on growth to help their companies emerge from the downturn—but while holding onto the cost reductions they achieved over the past three years. Automating this last mile of finance can help by keeping costs under control and by freeing up key resources to spend more time on growth-oriented activities.
Regulation will continue to change—but it is less and less possible to simply apply more people and hours to meet this challenge. Automating the process will result in streamlining and improved accuracy while generally easing the pain of compliance. It is, in short, a business case you should consider making now.
Barnstone provides strategy, advisory, system implementation and outsourcing support services to many leading organisations in South and Sub Saharan Africa. The Barnstone group focuses on:
• Executive advisory services
• Fraud risk consulting
• Governance Risk and Compliance systems
• Sustainable development strategies and systems implementations
• ERP application management implementation and outsourcing services, mainly SAP focused
• Point to point communications in remote areas across Africa
• Business process outsourcing services
• Providing skilled resources for technology projects
• Private Equity Investments.
• Healthcare products and is a distributor of various wound care products
Barnstone has offices in Pretoria, Centurion, Johannesburg, and Cape Town South Africa as well as Perth Australia. For more information http://www.barnstone.co.za/