The process further slows down the availability of financial data for internal planning and analysis, and this can put an organization at a competitive disadvantage. The time-consuming work also may result in delayed testing of the company’s Sarbanes-Oxley (SOX) controls by internal audit.
This is not a good thing. Under Section 404 of the Sarbanes-Oxley Act, internal control deficiencies must be disclosed in the annual report. The reverberations of a disclosure can shake investors’ confidence in the organization, as it may indicate inefficient accounting and finance processes, subpar technology and inferior management, combining to adversely affect the company’s reputation.
HOW CONTINUOUS ACCOUNTING WORKS
These varied problems with closing the books – overwrought accountants, higher labor expenses due to the need to staff up, and inadequate time for planning, analysis and SOX-have long been in need of a solution. Continuous Accounting appears to be the answer.
Automated software tools can now help split the peaks and valleys of an accountant’s workload into discrete elements. Tasks can be scheduled early in the accounting process and embedded within accountants’ workflows. By breaking the tasks into smaller pieces and then automating each one, their completion becomes “routinized,” says Galeaz.
Accountants can now attend to their closing tasks at a deliberate pace. With visibility into each day’s transactions, they can perform the data summations, reconciliations, error checking and corrections as part of their daily work. They can track their close calendars and auditor PBC lists on a more regular basis. The pile-up at the end of the month, quarter and year largely disappears.
“By systematizing and automating the closing process, you’re no longer working backwards to explain what happened,” says Galeaz. “You have the time and ability to look at trends and to influence outcomes.”
Tucker concurs. “By creating a mindset to embed the closing tasks into the daily workload, and then using automated technology to manage the work, you optimize the accounting process one task at a time,” she says.
The first step in this journey is to assess how a particular accounting task is executed to close the books. Step two is to analyze how this process can be improved by scheduling the task as a series of smaller steps. Step three is to automate the process.
Let’s take the example of an organization’s current payroll process. The task is to ensure accurate federal and state tax withholdings, as well as the withholdings for health insurance and contributions to an employee’s 401k plan.
“The continuous tracking of all these transactions – from creation to action to reporting – is next to impossible in many accounting and finance organizations today,” says Brad Baer, partner, and leader of the finance transformation advisory practice at management consulting firm UHY Advisors Inc.
“You don’t want a situation where you’re overpaying taxes and now have to claw back these overpayments from a state,” Baer says. “You also don’t want to be in a situation where you’ve underpaid the taxes.”
Tracking withholdings is a challenge for a business with thousands of employees because it requires managing the transactions driving the payroll process, in addition to the payroll activity and reporting. This information may be in different files in the ERP and payroll processing systems, and involve various banks. Accounting and finance staff must discern if and when all the payments cleared the banks, and then determine if the withholding amounts matched the payments provided to the government, the health insurer, and the financial firm handling the 401K plan. The staff is further responsible for tracking the payroll disbursements that fail to clear, and remitting them to the appropriate state as part of the escheat process.
To ensure proper reporting, accountants typically must look through numerous spreadsheets with thousands of checks, wires, and ACH payments.
“Ensuring everything withheld was actually paid is typically a tedious process,” Baer says. “The stress is enormous. If issues arise and are not resolved, there is significant risk from the federal and state governments concerning proper reporting of the escheat tax.”
The solution requires splitting the work into discrete tasks and using automated account reconciliation and transaction-matching tools. With these tools, the withholdings for the health insurer and the financial firm providing the 401K services can be managed at a transactional level on a real-time basis throughout the transaction lifecycle. Also, the tools ensure that the various banks have cleared the checks, wires and ACH payments.
If the withholding data at the banks doesn’t agree with the files in the ERP and payroll processing systems, these issues can be identified in real time. Accountants can take care of any matters as part of their daily schedule.
“If there is a problem, an accountant can call up the payroll processing provider, for instance, and say that something doesn’t add up,” Baer says. “The bottom line is that all this stuff isn’t postponed until the last minute.”
Continuous Accounting also promises continuous improvement of the accounting and finance function. Using predictive analytics, CFOs can assess the effectiveness of the accounting process by measuring the time it takes accountants to close the books, or track the number of errors committed during the time period. Such insights can guide more refined accounting and finance practices going forward.
By providing the means to work at a more measured pace, continuous accounting can also help improve the work-life balance for company accountants. And the time that accountants do have can be better used, thus helping the CFO. As Tucker says, “A more systematic approach to accounting frees up the accountants to contribute to the strategic goals of finance leaders with value-added analyses of financial performance.”
“This was impossible before, given their time constraints,” she says.
This future state of accounting and finance optimization is now at hand. All it takes is the determination to no longer abide the status quo, and the resolve to improve it.