FINANCIAL REPORTING FATIGUE™ What’s Your RISK?

Your team is the foundation anchor of the financial reporting production function. You have strict deadlines to meet with voluminous deliverables, but that isn’t anything unusual for the team. You have a routine to run key critical processes, and you are fairly confident internal controls in place are adequate. Yet, as another reporting cycle is upon you something is different in the report production process. There is an unanticipated failure and data integrity critical to the reporting cycle is suspect. You discover that the impediment affects more than one process because financial functions are intertwined. Checks and balances? Not likely to save a catastrophic failure. What happened? You’ve fallen victim to Financial Reporting Fatigue™.

Financial Reporting Fatigue™ refers to a condition when a weak link(s) in the chain of the financial production process places stress on other stages within the reporting cycle that are reliant upon the other. If a bridge has weakened stress points in critical areas of its structure propagate could result causing catastrophic failure ultimately ending in bridge collapse. Financial Reporting Fatigue™ (FRF) risk is akin to bridge support erosion because of the interconnection of data and process. Left unattended, this condition will fester throughout your production reporting cycle.

What causes FRF? The investigation can potentially drill to the lowest denomination covering both skill and automation.

Our recent survey touched upon this subject matter. The financial professional respondents displayed a common theme worth exploring. The extracted data displayed below is pertinent to the subject at hand:

1. Do you feel pressured during the financial close cycle in meeting closing deadlines?
Yes    48%
No     52%
2. Does your organization use tradition enterprise resource planning software to record business transactions?
Yes   82%
No    18%
3. Does your financial team have to create supplemental spreadsheet reports and analytics to disclose and report your business financial information?
Yes  100%
No      0%
4. Do you feel your financial team’s offline reporting could pose a risk if something went wrong?
Yes   65%
No     35%
5. Does your team suffer from Financial Reporting Fatigue™?
Yes    42%
No     58%

The above provides an interesting interpretation of what is occurring within these financial departments. Departments operating under pressure and stress are more likely to create a rush to close, not quality to close. The use of an automated system to record business transactions provides the level of comfort and security needed to support the financial close process. It is what happens beyond the financial database extraction that poses the most risk and uncertainty. Items 3 & 4 tie together. Human intervention engaging the best thought out process is not air tight. As 100% of respondents use spreadsheets to disclose and report financial results, statistical odds are working against you that an internal reporting error will rise up in the production process.

I had the opportunity to sit with a financial head of a mid-market sized organization and witness firsthand, why real automation, not automated spreadsheets, need to take hold of the production reporting cycle. This visit entailed a review of a V3-spreadsheet statement of cash flow that was not calculating properly. When the spreadsheet was put up on a projector for us to see, I noted tracing through the data, a number of cells within the spreadsheet had errors. Reference points appeared to hold the majority of mistakes, though we did discover other mathematical formula errors. When the data was dumped from the mainframe to workable spreadsheet files something got lost in translation. I asked a very basic question; ‘how can you be sure nothing has been manipulated through this point? That the raw data extracted from your database is the reflection you are viewing now? This is the third attempt.’ After a few hmmms…it was decided the best course of action was to trash the spreadsheet and start again. It takes hours to check and correct reference point mistakes and mathematical errors in large complex workbook files. This is very tedious and time-consuming forensic work that eats away at reporting deadlines. How does your team determine the internal process causing variation? Ask yourself these thought provoking questions:

What causes defects and/or errors?

What are the ways to address the defects?

What needs to be developed to measure changes made in the process?

Get the hmmm out of the financial report production process. Look at what needs to be brought in to change the process. A financial reporting team reports; they should not hold positions of ‘in-house software developers’ creating home-grown external reports. Bad idea.

What’s the risk? That’s a bit of a loaded question. Sitting through an audit committee review of financial data is not a pleasurable experience. What would occur if your external auditor discovered the financial reporting error? That’s at least a 1/2 day discussion of vetting the root cause. The majority of survey respondents deemed a breakdown within the financial reporting production led to audit risk.

That brings us to the last item pulled from the survey. Though 100% of the respondents use spreadsheets to disclose and report their financial reports, 42% of the same respondents were concerned about FRF. How does the other 58% reconcile the disparity? Are you that certain? What is the limit of risk you can live with?

How often do spreadsheets used in the financial report production process change hands? Do you allow spreadsheet modifications to be performed by new staff? How would you even know if that happened?

To further illustrate, a multi-national company uses a traditional financial database in which a download is performed to extract the entire trial balance to a spreadsheet. Upon extraction, in-house finance personnel create spreadsheet pivots to format the data for management reporting. Note to self; a pivot table is only as good as the data you put into it. The values were off as lines were not picked up. In addition, when a pivot recipient further extracts data by some defined parameter out of the pivot table, those values are easily overwritten. Who corrects that? Does something along the way get ‘forced to fix’? Hmmm… that’s an OMG moment.

Automating your financial report production process will improve efficiency, integrity and reduce FRF risk. Automate as much as possible in reporting, planning, cash flow and working capital performance measures.

You’ve come full circle. Between budgetary and time constraints how can you view opportunity for improvement? The answer is a simple one. Either you make time in search of innovative solutions to improve, enhance, speed-up and secure by automation the financial report production process, or maintain the status quo and wait for the hammer to fall. In the meantime, the internal clock ticks away with Financial Reporting Fatigue™ silently percolating.

Smart selection; our value proposition-
OIKOS Software offers secure, permission based access to our suite of cloud-based applications for financial reporting and analytics. Unlike traditional financial software systems, OIKOS Software applications are accessed via a computer and the internet. There are no servers to buy, no capital expenditure investment, no upfront costs, and no additional IT staff needed. We provide training, support and if needed, custom implementations so your financial team can immediately increase productivity, reduce cycle time to close, view critical data in real time, and, by harnessing the power of proprietary analytics, lower company risk from inaccurate measurement of working capital, cash flow, financial planning and reporting. Use OIKOS Software in‐house, or our OIKOS Software consultants can manage the applications for you.
www.oikossoftware.com                                                    +1-855-OIKOS-00
https://www.youtube.com/channel/UCNMoCOri5jm7eUuCGyZlAFw

Copyright 2015 OIKOS Software, Inc.Financial reporting fatigue

Advertisements

Benefits of Cloud Services

BENEFIT                                                                            DESCRIPTION
Cost Savings                                                                    Immediate cost saving opportunity up to 50% by simply shifting basic
services into the cloud.
Productivity                                                                      Cloud services use subscription pricing models that outsource support
and maintenance to providers that have greater resources and
expertise. This allows business to free up resources and focus on core
business.
Lower time to market, increased scalability                    Smart adoption of cloud services reduces time to market for new
products and services and allows almost limitless scalability for almost
no marginal cost. In the face of global competition reducing time to
market will be a key competitive edge for businesses.
Overcome barriers to capital and expertise                    Cloud computing can help overcome the traditional barriers companies
face through limited capital and expertise. In comparison to traditional
Information Communications Technology (ICT), cloud services can
allow businesses to acquire new capabilities at only a fraction of the cost.
Improved reliability and security                                     Cloud services offer a range of benefits including increased security, access to the latest upgrades, integrated management and backup that may not be available to organizations that are not ICT focused.
Mobility, flexibility and a platform for growth                   Mobility supports faster decisions and agile business models with a
greater potential for growth. Mobility has been identified as a key
driver of cloud service adoption. Research in 2012 found businesses
that had adopted the cloud were potentially:
• More likely to increase bottom line;
• 2Xs likely to grow their range of products and services
compared to those who had not adopted cloud; and
• 3Xs as likely to increase staff numbers in the coming year.

Safeguarding Assets

US businesses safeguard their assets. An astute executive employs local jurisdictional rights in support of safe measured expansion and asset protection. These rights include the application of local business law, insurance protection, currency management, contingency planning, and efficient repatriation. When this armament is employed through a best-practices approach, businesses are well equipped to navigate through the international battlefields of commerce.

Traditionally the term ‘safekeeping’ meant that financial institutions were physically trusted with securely safekeeping one’s liquid assets. The custodial responsibility over assets has broadened to include other physical and intellectual assets of a company such as marketing materials and processes, customer relationships, deferred tax assets, fixed assets, inventory, manufacturing processes, formulas, patents, and trademarks. It is senior management’s fiduciary duty to defend and protect all items of ownership. When is it appropriate to trust the safeguarding of assets to others outside of one’s control? How are these risks identified and measured? What is the business contingency plan to safeguard assets?  How does your organization control its cash conversion cycle?

Safeguarding assets begins with the implementation of appropriate internal and external controls, and employment of a sound financial disaster recovery plan. Setting policy as to who has access and control over certain aspects of one’s assets is the first step in understanding where a risk of loss may exist. Today’s businesses must implement controls beyond traditional physical safeguarding.

Implement sound internal controls and contingency planning.

Jurisdictional business regulations are predicated on a region’s ability to attract and derive revenues from the local accumulation of wealth. The concept of a permanent establishment (PE) defines certain activities a business performs in a jurisdiction may trigger local taxation. These activities defined in a country’s bilateral treaty may negate or reduce levels within tax classifications. Maintaining control directly over one’s assets in another jurisdiction may cause PE, and depending on the jurisdiction, there could be taxation without representation (including a lack of jurisdictional and commercial legal protection unless incorporated). Choosing where and when to separately incorporate activities is vital to measured expansion and related protection of a multi-national corporation. It is therefore prudent to have a sound expansion plan including substance over form detailed within the business risk profile. It is necessary to remain flexible in order to brace for any crisis caused by economic, political, pending or enacted legislation to ensure the safeguarding of your assets.

Automate your cash conversion cycle

Your existing ERP system doesn’t provide full transparency and accuracy of your cash conversion cycle.  More likely than not, you will be required to report these business performance results to senior management. Through efficiency automated external processes, your organization should be able negate the ERP deficiencies. OIKOS Software is one such company that provides a Treasury SaaS cloud-based suite application for the cash conversion cycle.  Automate therefore regulate.

Understand the benefits of incorporating in the jurisdictions in which you operate.

Operations by multi-national businesses in foreign countries are susceptible to risk from physical, economic /financial (accounting) loss or both. The former may be in the shape of fraud, theft, business interruption, or natural disaster; the latter in the form of foreign currency fluctuation, loss of market share, or write-down of related intangible assets.

Local laws protect entities from infringement, fraud, or theft and provide for certain legal remedies. Most countries have local mandatory insurance coverage requirements for physical loss. However, directors and officers, fiduciary bonds, and general liability insurance are vulnerable; there may not be adequate access to capital to compensate directly for a loss.

Understand the jurisdictional shortfalls and coverage nuances of insurance and local laws.

Transacting business outside the US may lead to doing business in currencies that are not US dollars ultimately leading to foreign exchange risk. Implementing a global banking cash reporting platform is an optimal way of instantly tracking multi-currency cash balances. Uniformity of financial policies and applications provides additional control over assets held by foreign affiliates, and may further assist in identifying foreign currency exposures. There are multitudes of ways to protect against the movement in value of a currency, accounting losses, and actual cash loss currency fluctuations may cause. By standardizing reporting, identifying offsetting currency movements (natural hedge techniques that offset the effect of foreign exchange fluctuations internally), and implementing formal hedging policies and instruments, businesses can offset or defer the impact of exchange volatility, further stabilizing their asset values.

Understand currency exposure, from net positions of unhedged currency to use of hedge instruments to mitigate volatility.

Measure, assess, then measure again.

Assets are protected through application of appropriate local law, insurance, contingency planning, and hedging techniques. Repatriating assets such as cash can be done efficiently at minimal cost to the owner, or ineffectively through the triggering of tax costs well in excess of the property value, triggering of accounting losses, and/or the absence of exchanging into appropriate currencies timely or efficiently. Knowledge of local jurisdictional laws, US international laws, treasury practices, and domestic & international accounting rules is essential to ensure the property repatriated is maximized and any adverse financial impact minimized.

In determining a risk profile, safeguarding assets is a top priority. Risk averse companies will not speculate their assets. A best practice organization will analyze the market tolerance and measure economic scale and scope.

For example, economics scale refers to organizational size (total assets, equity and sales) while economic scope refers to an organizations diversity of operations such as Foreign Direct Investment (FDI). This could include the number of geographic locations, and the complexity of operations. While overall size reflects economic scale and the arms of the organization  (i.e. foreign operations) reflect economic scope, the level of income reflects BOTH economic scale and scope. The level of income reflects economic scale because the size of the company influences the size of pre-tax income. The level of income reflects economic scope because the diversity of the company’s operations influences a company’s ability to offset losses with income from other business segments.

A best practice company establishes clear vision, set goals and executes. These goals are achieved by implementing controls, policies and automation. Under their defined policies, companies will identify, mitigate, and measure potential exposures. Companies safeguarding assets frequently report and account for transactions by monitoring, measuring, and managing risk exposure. These internal processes, i.e. the COSO (the Committee of Sponsoring Organizations) framework or driven by Six Sigma improvements, are executed by an organization’s board of directors, key management and other personnel designed to provide reasonable assurance.