Driving global compliance through financial consolidation

Under new tougher local and international legislation companies are required to provide financial statements that fairly disclose their financial position, performance and cash flows. This is necessitating changes to existing accounting policies and practices, and companies that previously believed this to be a once-off effort are being shaken to their roots by the realisation that compliance is an ongoing, high-cost event.

Says Christo Nel of Cognos, a business intelligence and performance management solutions vendor: "The potential global merging of related standards, such as the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Practices (GAAPs) implemented by different countries, will deeply affect accounting and financial reporting practices in the coming years. For many organisations, this is driving a shift from immediate regulatory response to ensuring sustainable long-term compliance. Business priorities are on changing internal processes and technologies so they`re repeatable and effective."

However, meeting this challenge is difficult for organisations using manual, inadequate, or multiple consolidation systems for their financials. The result: they are unable to structure, control and automate the process for internal and external reporting, and are unable to gain a single, accurate view of financial results.

"Reliable financial data is the backbone of compliance, and a robust consolidation system provides the foundation for accountability. It is the jumping off point for delivering greater transparency and management of company performance," says Nel. "In contrast, using manual and inadequate consolidation systems creates inefficiencies, exposes the process to errors and increases compliance costs."

Ineffective systems negatively impact the bottom line, as businesses sacrifice performance initiatives to instead direct time and resources toward fixing errors and re-working the numbers. This can lead to further inspections, audits, and restating of financial statements, which drive expenses even higher.

"In the current regulatory environment, companies need a consolidation system that streamlines processes, ensures accuracy and helps control costs," Nel emphasises. "Such a solution will allow organisations to effectively manage financials; reduce the risk factors for errors, fraud and manipulation; lower the cost of compliance audits; and accelerate the closing and reporting process."

The first priority is to focus on improving the core systems that directly support financial reporting and accuracy, Nel suggests. This means looking at the processes for gathering, consolidating, and reporting financial information results, and finding improvements to deliver the information in a more transparent, accurate, secure and timely manner.

Transactional systems, spreadsheets and first-generation financial systems are not fulfilling new regulatory requirements. To produce appropriate financial statements, a single aggregated view across all transactional systems is required. Enterprise resource planning (ERP) and ledger systems, while excellent for storing data and managing the transactions that support the business, are not designed to easily integrate or consolidate data from other sources. Spreadsheets, meanwhile, lead to duplicated effort and open the door to inconsistent data interpretation, drive unacceptable rates of input errors and leave organisations without means to secure or audit information or changes to data.

First-generation consolidation systems are a major improvement on these systems, allowing organisations to integrate financial and operational data, consolidate financials at each level, and close books quickly and effectively. Many provide allocations, eliminations and currency conversion to further accelerate the process. But while these systems address many of the fundamentals and core tasks, they don`t address some of the more leading-edge issues: - ie, how to provide the required set of accountability and audit controls demanded in the current climate and how to seamlessly adapt to evolving accounting standards and global business requirements.

"It is no longer appropriate to provide supplementary processing with multiple systems, spreadsheets, and people," says Nel. "A single, centralised platform for all processing and calculations that uses a single version of the truth is needed. In addition, reporting must support delivery of many styles and types of reports - for example, producing reports across multiple GAAPs - and providing a line of sight from management reports to financial statements. Systems will also need to be able to handle different consolidation and reporting complexities across multiple jurisdictions, and be adaptable, reflecting business changes in a timely manner."

Financial consolidation not only minimises compliance, providing the foundation for accurate, validated and auditable financial information - it also provides the foundation for better business management.

"Selecting and implementing a suitable financial consolidation solution will deliver greater control, accountability, transparency and governance but it needed stop there - the basic architecture and infrastructure for gathering compliance-related information can be easily extended to provide better business management," says Nel. "This will boost the organisation`s ability to implement effective performance management and help manage key risks.

"The visionary CFO strategically thinks about the financial data environment across all time horizons, he explains. "Financial consolidation delivers the validated, historic results. This creates the starting point for business planning and rolling forecasts. Effective planning drives higher levels of predictable financial and operational performance. In terms of compliance, predictability results in fewer regulatory and investor surprises.

Cognos 8 Controller, the latest financial consolidation software from Cognos, offers pre-defined functionality that helps companies simplify consolidation, compliance reporting and management reporting processes. It offers even greater advantage through its integrated enterprise planning, business intelligence, scorecarding and performance management functionality, however.

* Consolidation of multiple, diverse ledgers with thousands of operating units and accounts into a single, common chart-of-accounts structure and secure a single, accurate view of key corporate information;
* Rapid creation of reports to facilitate compliance reporting and evaluate financial results with confidence and accuracy across multiple countries, currencies, and legal entities, each with their own accounting policies intact;
* reduction of consolidation, close, and reporting cycles by days or weeks; and
* Support of better planning and forecasting, providing a firm foundation for operational and strategic decisions.

Says Nel, "Our solutions for corporate performance management let organisations drive performance with planning and budgeting, monitor it with scorecarding, and understand it with business intelligence reporting and analysis. Cognos is the only vendor to support all of these key management activities in a complete, integrated solution."

Cognos SA will be hosting a "Finance Forum" in October 2006. The purpose is to assist and educate CFOs and accounting professionals with financial issues that can be simplified through business intelligence (BI) and performance management (PM) solutions.

The seminar will also include guest speaker, Jeremy Hope from the UK, who will share his vision for the next iteration of the CFO`s role. Jeremy is co-founder and research director of the Beyond Budgeting Round Table (BBRT), an organisation dedicated to helping firms improve their performance management processes.