The Financial Close Process: Implications for Future
Research
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
OutlineOutline
Introduction Motivation Method Results Summary
Financial Close DefinitionFinancial Close Definition
routine process of completing the accounting cycle and preparing internal and external reports
Financial Close ProcessFinancial Close Process
Enter & Process Transactions
Report & Disclose Information
Aggregate & Analyze Results
RemediateControls
Evaluate & Test Controls
§302Certification
Audit Opinion
Form10-Q10-K
BoardBook
AuditOpinion??
AggregateFinancialAmounts
ReviewPreliminary
Results
PerformFinal
Adjustments
Report &Disclose
Information
ERP
Word
Excel E-mail Word
Excel E-mail
Why is financial close process important?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 approachOur 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 factorsFour factors
Need to meet expectations
Collaboration between multiple participants
Estimation process
Ability to incorporate new regulations into the financial close process
Need to meet expectationsNeed 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 participantsCollaboration 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 processEstimation 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 processAbility 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 InvestigationField 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 expectationsFindings: 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 participantsFindings: Collaboration between multiple participants
Very important; particularly for organizations with decentralized accounting functions
Findings: Estimation processFindings: 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 processFindings: 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 expectationsFuture 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 participantsFuture 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 processFuture 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 processFuture 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?
SummarySummary
Financial close is important and potentially under-researched topic
Recent economic volatility, increase in restatements has increased pressure on companies to timely report performance
New regulations have increased accountants’ period-end 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
SummarySummary
Future research is needed regarding the following factors impacting the financial close process meeting or beating management expectationscollaboration – hidden profile tasknew standardsestimates
Questions??Questions??