July 07, 2016

Continuous Accounting at the Speed of Business

Continuous Accounting at the Speed of Business Image | BlackLine Magazine

This article originally appeared on CFO.com

Ever wonder where the term, the “last mile” of finance, originated? This oft-used phrase to describe the month’s worth of work painfully squeezed into a few days to close the books refers to the final steps taken by a prisoner condemned to die. Company accountants can relate to this fate.

Compressing the closing activities for financial reporting into scant days results in overwrought accountants more likely to make mistakes, high labor costs to staff up for the peak overload, delayed forecasts by FP&A (financial planning and analysis), and tardier testing of Sarbanes-Oxley controls by internal audit.

Why, then, do so many CFOs permit such disarray? The answer seems to be that Finance has become hardened to the status quo, simply used to the madcap sprint to ready the close for financial reporting and disclosure at the end of the month, quarter and/or year. That’s not fair to company accountants. Lost in a labyrinth of spreadsheets, accountants agonize when a discrepancy arises, unable to detect how the error occurred, much less who caused it.

There is an alternative to this lunacy. It’s called Continuous Accounting and it involves virtually closing the books at nearly the pace of business. Instead of a horde of accountants hunkered down in a condensed period of time to perform the closing tasks, they can attend to the data summations, reconciliations, error checking and corrections at a measured pace.

It’s a radical concept—closing at the speed of business—but one whose time has come. Instead of pulling accountants from basic bookkeeping functions and pushing them into an abrupt period of account reconciliationsvariance analysis and transaction matching, they can apply the allocations and make needed adjustments incrementally. A little bit today, a bit more tomorrow.

Task By Task

There are so many benefits to Continuous Accounting that before long, every CFO will insist upon this automated approach to the financial close. A case in point is the risk of a material weakness—the reasonable possibility of a material misstatement in the company’s annual or interim financial statements that cannot be prevented or detected on a timely basis. Under Section 404 of the Sarbanes-Oxley Act (SOX), such internal control deficiencies must be disclosed.

When accountants manually attend to the financial close using spreadsheets, it heightens the threat of a material weakness. This is because different people tend to use spreadsheets in different ways to document transactions and other account information. When an inquiry arises over the accuracy of documented information, accountants must collect and appraise thousands of spreadsheets to determine if the balances are correct.

This forensic nightmare is made worse by figuring out who did a reconciliation or should have done it. Contacting a coworker with their questions by phone, email, and text, accountants may learn that the colleague can’t trace the document or simply forgot to preserve it. In some cases, the individual may have left the company’s employ. Such circuitous workflows stress out accountants who are already overwrought from the deadline pressures of the close, making them more likely to make mistakes. Unfortunately, this is when their accuracy counts most.

If the company subsequently discloses a material weakness, the repercussions are humbling—cultivating wide-scale opinions of operational misalignment, inefficient finance and accounting processes, and serious questions about the caliber of executive management.

Continuous Accounting alleviates these concerns, by easing the mind-numbing process for accountants to verify the accuracy of transactional data. By flattening the peaks and valleys of their workload into regular work cadences, accountants can easily track to-do lists such as close calendars, auditor PBC lists, and regulatory compliance controls. Freed up to achieve a more efficient and faster close, they can strategically assist the CFO in improving the company’s financial health.

Benefits Too Big To Ignore

By turning the last mile of finance into a leisurely jog, other benefits abound. No longer do FP&A analysts have to wait until the close has concluded to deliver the business forecast. With Continuous Accounting, they get an early jump on assessing the financial data, resulting in more insightful, informed and timelier decisions made closer to when business occurs.

Finance benefits as well, by no longer needing to staff up during the close period, hiring temps to pick up some of the slack. By flattening the customary peak overload of work, significant labor cost savings can accrue. And by giving accountants the freedom to manage their workloads at a more civilized pace, they’re more apt to like their jobs, reducing turnover rates. No longer restricted to an abridged time period in which to verify a critical mass of spreadsheets, they can reconcile an account virtually after the inception of a transaction.

Continuous Accounting is just the latest in a series of continuous improvement business principles, from Just-In-Time manufacturing to the agile methodology of software development. By building quality into finance and accounting processes, productivity is optimized—accountants giving 100 percent of their effort each business day, as opposed to 50 percent some days and 200 percent other days. This opportunity is at hand today. Say goodbye to the last mile.

Therese Tucker

Modern Accounting