Maybe you’ve heard the old saying that “Change is the only constant.” That has always been true, but these days change seems to be happening a lot faster than ever before. (It’s not just your imagination.)
The products and software you use in your personal life and the ways you communicate and collaborate at work are evolving at an incredible pace. Companies launch products, services, payments, and sales channels faster than ever. Products that used to take years to develop now take months.
There’s a name for this trend: the law of accelerating returns. In a nutshell, it states that advances happen at an exponential rate, not a linear one.
In accounting departments everywhere, all that accelerated activity is stressing traditional methods and processes and increasing both transaction volume and accounting complexity. Updated accounting principles, new tax rules, and greater audit scrutiny are coming thick and fast, and everyone across the organization seems to have an insatiable hunger for data.
It’s no wonder that traditional, legacy accounting processes that have remained unchanged for decades are now unsustainable.
In many organizations, the front office has been modernizing and digitizing its processes for a while now, while back-office departments like accounting and finance have stuck to their old ways. But the old ways just aren’t cutting it anymore in the face of today’s challenges, and accounting departments are being forced to modernize to keep up.
Modernizing accounting is much more than just a fancy v-lookup. The goals aren’t just to increase efficiency, speed, or financial statement integrity. Modernizing your accounting processes involves rethinking process, technology, and the way the function works.
So, we wrote Modernizing Accounting For Dummies, BlackLine Special Edition to help F&A organizations develop an accounting function that is less transactional and more strategic, delivering a higher level of value to the company.
Here is the first chapter of the book, Why Modernize Accounting?
Rethinking Your Accounting Process
In many companies (perhaps in yours as well), multiple departments are already digitizing processes at a dizzying pace. Marketing and sales are using the latest in automation and analytics to boost leads and speed up revenue. Customer service is trying out machine learning and artificial intelligence (AI) to anticipate and intervene on service issues and renewals.
Yet, in these same companies, accounting processes are still tied to the past, held back by rigid enterprise resource planning (ERP) systems, subledgers, and a collection of specialized applications with tenuous interconnections cobbled together over time.
Traditional accounting departments often rely on countless manual, static, repetitive processes — from journal entries to endless reconciliations — all of which drain productivity and increase risk. Their processes kind of worked ten years ago, but today they’re no longer feasible. Such time-consuming accounting processes are one of the top frustrations of many accountants.
Close Those Books, Fast!
Ever worked weekends to close the books? Or perhaps put in a little spreadsheet time while on vacation? You’re not alone.
Financial planning and analysis (FP&A) want the numbers to start forecasting. The chief financial officer (CFO) and board want mid-month numbers or real-time data and insights to make decisions. It seems like everyone wants all the numbers right now, and manual accounting processes don’t allow you to satisfy everyone’s demands.
Accruals, allocations, and adjustments, as well as balance sheet account reconciliations, all suck up time. And on top of that, there’s often little transparency into who’s doing what, which means even more time wasted waiting on other dependent tasks before proceeding to the next step in the process.
Evaluate the time it takes you to close the books and what you’re spending your time doing. Is there room to improve versus your peer group — and are you trending in the right direction?
You can take a temperature check on your accounting processes right now, by taking the following steps.
Benchmark Your Performance
Evaluate the total cost of your finance function as a percentage of revenue. CFO Magazine quotes an APQC benchmarking assessment of 543 organizations saying that top-quartile performers keep the costs of their finance function at 0.6 percent of revenues.
The median quartile registered at 1.2 percent, and the finance function for the bottom performers came in at more than 2 percent of revenues. Which quartile does your accounting organization fall into?
Estimate How Much Transactional Accounting You’re Doing
An unmodernized, manual accounting department typically spends 50 percent or more of their time on transactional accounting, doing things like manual journal entries, bank reconciliations (recs for short), and so on.
How much time does your team spend wading through the spreadsheet weeds?
Ballpark the Upside of Automation
PricewaterhouseCoopers (PwC) found that 30 percent to 40 percent of finance time can be saved with automation. And most accounting surveys find similar results.
Where would your team spend that extra time?
Accounting is an Overhead Expense
The accounting function is not directly associated with producing revenues, and accountants are faced with the reality that the accounting function is overhead. This reality brings heightened awareness to the need to keep the costs of the accounting function to a minimum, while maintaining strong controls and producing accurate financials.
Leaders of accounting organizations are seen as heroes when they modernize the accounting function, reducing cost and producing more timely financial results with greater accuracy.
Audit & Compliance Challenges Are Rising
Many accountants are holding their breath during year-end audit procedures, hoping the auditors don’t uncover any deficiencies, significant deficiencies, or worst of all, material weaknesses.
Furthermore, audit costs keep relentlessly ticking higher. Fees stabilized after the initial spike from the Sarbanes–Oxley Act (SOX), but the increasing amount of accounting time spent meeting audit requests has not. That’s the hidden cost of the audit.
For example, controls in many accounting processes are often spread out, varying across multiple locations and business units. Inadequate explanations and supporting documentation are often significant factors, too.
Simultaneously, a lack of follow-up on aged items, an inability to quickly answer auditor questions, and a lack of overall visibility all tie up accounting resources even more.
These truths coupled with the traditional lengthy, cumbersome audit process make for a key driver for the need to embrace modern accounting.
This situation runs up the overall cost of an audit. Accounting departments have better things to do than hunt down the details for auditors, right? If only we had the time.
Forcing accounting departments to hunt down the paper trail to meet audit requests is painful. Modern accounting organizations have moved to a self-service model, where auditors can securely log in and get the detail themselves. Get your digital copy of the book to learn more about this.
More Complexity Increases Risk
You may think that financial errors would be few and far between. However, a recent survey of more than 1,100 C-level executives and finance professionals by software provider BlackLine and independent research firm Censuswide suggests otherwise.
The survey indicates a great divide between opinions on data accuracy among finance professionals versus senior executives. Among members of the C-suite, 71 percent expressed complete trust in the accuracy of the financial data. Of the financial professionals — a group comprising financial controllers, accountants, analysts, and internal auditors who prepare the financial statements and reports — only 38 percent felt the same way.
It’s not surprising that manual accounting is linked to financial statement integrity risk and elevates the chance of fraud. In a recent Censuswide survey of more than 1,100 C-level executives and finance professionals worldwide, more than 50 percent said they aren’t entirely confident that they can identify financial errors before reporting results.
With all the change that’s going on with businesses introducing new products, pricing, and sales channels, it’s easier than ever for things to fall through the cracks.
Manual accounting processes are often fertile ground for fraud, with gaps in standardization, controls, flux analysis processes, separation of duties, balance sheet analysis, completeness, and spreadsheet dependencies. Specifically, journal entries create exposure due to sheer volume, correcting entries, lack of supporting detail and validation, top-side journals, and other areas.
Maybe that’s why in the same Censuswide survey, accountants in the know are hesitant about data integrity, with just 38 percent saying they trusted the numbers.
Manual data inputting, lack of automated controls and checks all contribute to financial statement inaccuracy. The Association of Certified Fraud Examiners found an 80 percent to 90 percent higher incidence of fraud in companies with material weaknesses.
It doesn’t have to be that way. Technology is now readily available to create and post journal entries while minimizing human intervention.
Today’s CFOs Want Strategic Accountants
Gone are the days where accountants can simply sit in their offices and crunch the numbers and still be viewed as providing value to the organization.
Accountants today are expected to collaborate with the business to understand key drivers and bring critical accounting guidance to business decisions.
Get your free copy of Modernizing Accounting For Dummies to read the rest of the book. It provides a roadmap to help you move to modern accounting and drive finance automation at your F&A organization.