by Kevin Shives, partner at Sensiba San Filippo
The accounting close process is a time-critical activity with an often unforgiving deadline. It requires the synchronization of people, processes and systems to produce the results necessary to satisfy the needs of management and other stakeholders. No matter the size and complexity of your organization, your industry or number of locations, you likely have the challenge of the monthly accounting close.
While varying in degree, all effective and efficient closes will have the following five features:
1. Definition.
What is the close? When does it start and how do we know it is complete? A lot of professionals will see these as obvious questions. However, many organizations will define the close one way, but an objective evaluation will show that it is actually something else. For example, a CFO may proudly state their company books are closed in 5 days, yet when you interview the rank and file, you find the actual Close and reporting activities continue for several weeks after month end. It should be clear to all involved what activities are included in the close. These activities are generally published as a close task list and calendar. Which brings us to the next important feature: accountability.
2. Accountability.
Once your close and tasks are defined, the next step is to ensure each activity has a single owner. This is important because a task assigned to a group or more than one owner is not really owned by anyone. This diffused responsibility might show up on a close task list as, “Day 3: Prepare the un-invoiced receipt accrual, Responsibility: Accounts Payable.” A best practice approach would be to assign the task to a specific person, “Sally C.” as the preparer, plus indicate a reviewer. Additionally, offering a link or reference to more specific instructions on how to actually perform the task is very helpful, especially if/when that task needs to be reassigned to another person. This also helps with training and process consistency in the close.
3. Visibility.
Once your close is properly defined and task responsibilities are assigned, you will need to establish methodology to track the progress. Commonly, the close task list is maintained in a shared location and process owners are required to annotate the list as they complete the assignments. There should also be regular meetings and communications to raise issues, as well as a protocol to escalate and remediate problems to keep the close on track. Visibility is also necessary to properly balance the workload of close. Overwhelming one or two of your staff will increase the risk of error and lead to increased turnover. If you can see the assignments, you can spread the responsibilities more evenly.
4. Documentation.
The close process generates a significant amount of documentation, all of which is necessary to support the assertions in financial reports. Archiving all this data in an organized and secure manner is critical. Additionally, there should be a clear audit trail for all the key data where an interested party (e.g. management, internal or external auditor) can easily determine the preparer, reviewer and the corresponding dates. Public companies generally require more controls over evidence than private entities, but all require an appropriate amount that satisfies the needs and expectations of management and other stakeholders.
5. Continuous Improvement.
Close activities will not remain static. Changes in accounting principles, new compliance requirements, acquisition, growth or key staff turnover are a few examples of events that will challenge the effectiveness and efficiency of your close. To make your close more resilient, develop Key Performance Indicators (KPIs) that measure and benchmark your close. Use these KPIs to motivate and reward staff and to instill a continuous improvement attitude in your organization. Number of days to close, number of errors, Auditor adjustments and overtime hours are some common KPIs. The most important thing about measurements is that they are meaningful, consistent and have the buy-in of all interested parties.
Tools to help implement and maintain these 5 features.
The features outlined above are completely necessary, yet often incompletely implemented and frequently fail during execution. As any seasoned controller will tell you, this is because it is difficult. It is difficult in part because the traditional close tools — excel checklist and reconciliations, network share files, e-mails, conference calls, manual workflow and meetings — are inadequate to properly manage this critical and dynamic process. The good news is that thanks to the Cloud, applications are now available to help you with all aspects of managing the close. These tools have the automated workflow and document management necessary to help you tame the close and make it more predictable in all respects. Choosing a close optimization solution that is a right fit is an important decision. At a minimum, be sure it covers the five features mentioned above.
Kevin Shives is a partner at Sensiba San Filippo. He specializes in Internal Audit, Sarbanes Oxley (SOX) compliance and systems implementation. Kevin can be reached at 408.286.7780 or at kshives@ssfllp.com.
