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Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of financeSlide 1 – MOVARIS CONFIDENTIAL
‘Last Mile’ of Finance:
Integrating the Close
April 19, 2006
Eric Keller, President and CEO
Transforming the ‘last mile’ of finance
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
Agenda
Financial close pains Regulatory guidance The ‘last mile’ of finance Checklist to ‘last mile’ success
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
The Financial Close
Series of interdependent tasks that a finance organization must perform on a quarterly and annual basis to produce the data and disclosures for SEC financial reports
External reporting
Compliancemanagement
Management reporting
Audit management
Analysis, Review,
Adjustments
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
Financial Close Process – Pain Points
Difficult to manage
Fraught with risk
Time pressures increasing
Expensive
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
Restatements: every CFO’s nightmare
Source: Restatements – Traversing Shaky Ground, Glass Lewis & Co., May 31, 2005 and January 2006
Increased regulatory oversight and
more complex accounting rules
Increased regulatory oversight and
more complex accounting rules
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
Growing Material Weakness Disclosures (MWDs)
1/3 of companies with MWDs had weaknesses in operational finance
46% of operational finance MWDs related to the close and consolidation process
Source: Movaris analysis of publicly-filed MWDs for 2004
Operational Finance Weaknesses
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
‘Last Mile’ Issues – Often Material Weaknesses
2005 SEC filings with material weakness disclosures
Misstated accruals and estimates made during close
“The company concluded that controls over the financial statement close process related to the determination of accrued liabilities and prepaid expenses were not operating effectively….resulting in numerous adjustments.”
Errors in intercompany eliminations
“[W]e discovered an error in a spreadsheet application, which was designed to eliminate intercompany balances. As a result of the error, amounts accumulated in the property account for one subsidiary were … inadvertently not eliminated in consolidation.”
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
2005 SEC filings with material weakness disclosures
“[T]he company did not maintain effective controls over the communication among operating, functional and accounting departments of financial and other business information that is important to the period-end financial reporting process, including the specifics of non-routine and non-systematic transactions. Contributing factors included the large number of manual processes utilized during the period-end financial reporting process and an insufficient number of accounting and finance personnel…”
Reliance on manual processes
Inadequate controls over non routine transactions
“[A material weakness in the] design and implementation of adequate controls over the financial reporting and close process, including controls over non-routine transactions.”
‘Last Mile’ Issues – Often Material Weaknesses
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
PCAOB Comments on Period End Process
“Given the high degree of risk that misstatements
could occur during the period-end financial
reporting process, significant attention to this
process is necessary in virtually all audits."
PCAOB Release 2005-023, November 30, 2005 (emphasis added)
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
CFO’s Operational Goals
Increase process efficiencies, devoting more time to analysis and less time to close and compliance efforts
Decrease both direct and indirect costs
Increasing financial statement accuracy while reducing risks of restatements and material weakness disclosures
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
Period End = ‘Last Mile’ of Finance
Audit opinion
Board book
FORM 10-K
Critical processes that bridge from transaction systems to financial statements
Typically informal, occurring outside any formal system of record Last opportunity to identify and resolve issues before statements
Financial CloseCRMERP*
SCM
Consol-idation
BI / DW
Excel
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
‘Last Mile’ of Finance – Disconnected Processes
Report & Disclose
Information
Enter & Process
Transactions
Evaluate& Test
Controls
Aggregate& Analyze
Results
Internal Controls
AggregateFinancialAmounts
Review Preliminary
Results
Financial Transactions
Financial Close
Report &Disclose
Information
PerformFinal
Adjustments
RemediateControls
§302Certification
ERP
Excel email Word
Consoli-dation
Excel email Word Audit Opinion
Board book
FORM 10-Q10-K
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
‘Last Mile’ Tasks – Many Not Automated
Mgt reports
FORM 10-K
Audit OpinionBoard book
302 Cert.
FORM 10-Q, 10-K
Report Production
Consolidation
I/C eliminations, minority interest eliminations
Aggregatefinancialdata
Enter & Process
Transactions
Financialsystems
Transaction
Systems
Reporting Entity Close
Consolidation
EnterAdjustingJournals
Provide evidencefor audit
Finalize Financial Statements
Re-consolidateto reconcile
Entertop-level
adjustmentsto reconcile
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
‘Last Mile’ Tasks – Many Not Automated
Mgt reports
FORM 10-K
Audit OpinionBoard book
302 Cert.
FORM 10-Q, 10-K
Report Production
Consolidation
I/C eliminations, minority interest eliminations
Aggregatefinancialdata
Enter & Process
Transactions
Financialsystems
Transaction
Systems
Reporting Entity Close
Consolidation
EnterAdjustingJournals
Provide evidencefor audit
Finalize Financial Statements
Re-consolidateto reconcile
Entertop-level
adjustmentsto reconcile
Develop disclosures
Review preliminaryresults in readiness
dashboard
Determinefinal, top-leveladjustments
“Close the books”-Reconciliations- Valuations- etc.
Performcompliance activities
Create & file financialstatements
Loadconsolidatedfinancials
Assessinternalcontrols with fin accounts
Provide evidencefor audit
Manualsteps
Review & approveconsolidated results.
Detect & resolve exceptions
Review & approve reconcilingadjustments
Review &approve adjusting journals
Financial
Analytics
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
Challenges in ‘Last Mile’ Tasks
Reporting Entity Close
Consolidation Finalize Financial Statements
Report Production
• Are all my close tasks complete?
• Did we miss any steps?
• What are my open issues related to the close?
• Did we have any control failures?
• Were all control remediation’s completed?
• Have we booked all adjustments?
• What’s the impact to my financial statements?
• Do we have documentation and approval for all top-level adjustments?
• Are all top-level adjustments posted to the system of record?
• Do we have supporting documentation for all elimination and consolidation entries?
• Is there review and approval documentation for each trial balance?
• Did each consolidation step occur?
• What are my open issues related to consolidation?
• Do we have supporting documentation for all footnote disclosures?
• Did we make all the required disclosures?
• Can we sign off on internal controls over financial reporting?
• Does the management reporting package agree with the financial statements?
• Is there consistency across all critical internal & external reporting?
x
xx x
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
SEC, PCAOB Call for Integration
“An integrated audit combines an audit of internal control
over financial reporting with the audit of the financial
statements such that the objectives of the two audits are
achieved simultaneously through a single coordinated
process.” PCAOB, Integrated Audit, May 2005
(emphasis added)
“We expect the internal control audit to be better integrated
with the audit of a company's financial statements….”
SEC , May 2005 (emphasis added)
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
From Disconnected Processes
Report & Disclose
Information
Enter & Process
Transactions
Evaluate& Test
Controls
Aggregate& Analyze
Results
Internal Controls
AggregateFinancialAmounts
Review Preliminary
Results
Financial Transactions
Financial Close
Report &Disclose
Information
PerformFinal
Adjustments
RemediateControls
§302Certification
Excel email Word
Audit Opinion
Board book
FORM 10-Q10-K
ERP
‘Last mile’ of finance
Consoli-dation
Excel email Word
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
To Integrated Close Solution
Consoli-dation
Integrated close
Enter & Process
Transactions
Report & Disclose
Information
AggregateFinancial & Control Results
Review Preliminary
Results
PerformFinal
Adjustments
EvaluateControls
Audit opinion
Board book
§302 Cert
FORM 10-K
ERP
Integrate internal controls, close tasks and financial reporting
in the ‘last mile’
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of financeSlide 19 – MOVARIS CONFIDENTIALSlide 19
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of financeSlide 20 – MOVARIS CONFIDENTIAL
What issues are holding up revenue
close tasks?
Slide 20 – MOVARIS CONFIDENTIALSlide 20
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
What is the magnitude of the
issue?
Slide 21
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
Estimated dollar impact is $385M.
Slide 22
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
What’s the problem with R&D expense controls?
Slide 23
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of financeSlide 26
What are the tax footnote issues?
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
Income Statement
Balance Sheet
Cash Flow
Tax Footnote
Slide 30
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
Movaris Checklist for a well-run close Integrate close, compliance task list
Automate routine business processes
Track, manage, secure, store critical documentation
Distribute tasks to the right individuals across company
Unify controls, close tasks, financial statement accounts
Apply analytics for continuous improvement
Automate creation of financial documents
Create system of record for ‘last mile’ activities
Transforming the ‘last mile’ of finance
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
Benefits of a Well Run Close
Decrease Costs
Reduce Time
Increase Confidence
Transforming the ‘last mile’ of financeTransforming the ‘last mile’ of finance
Benefits of an Integrated Close
A tight and robust financial close is the reflection of well honed
finance processes.