Why closing process difficult task to complete for most accountants and controllers? Historically controllers and accountants dread the first business day of the month. This is the beginning of a harrowing process that can last for weeks, as they struggle through the dozens of steps required to close the books for the preceding month. If there is an unusual result at the end of this morass, senior management may very well tell the controllers to go back and try again, in which case they are still closing the books when the next month is completed, which throws them into the difficult position of perpetually being in the business of closing the books — and nothing else. The main question is why it is so? This post covers the reasons why the closing process can be so excruciatingly tangled and difficult to complete, and addresses some of the more common problems associated with the closing process. By knowing the “why” then hopefully will lead us to the “how to”.
Some controllers are still not releasing financials before their time, which they seem to define as waiting for every conceivable supplier invoice to arrive and be logged in. This can make for a mighty long wait to see financial results, because some supplier invoices arrive long after month – end.
Waiting for supplier invoices is not the only area in which key information arrives late — there can also be inventory recounts, bank statements, and expense re-billings to customers. Whatever the type of missing source document, there is a mindset problem where controllers want to be ultra – certain that the information they release is accurate.
What these people do not understand is that financial statements are really a best guess at a company’s financial position at any given point in time — that is why there are reserves for bad debts, inventory obsolescence, warranty claims, and so on that may not be proved accurate (or inaccurate) for many months to come.
Lack of Procedures [Operation, Financial and Accounting]
No one knows what steps to complete first, how steps are to be performed, or to whom they must then be sent. Not only is disorganization rampant, but the financial results also tend to be inconsistent from period to period, because different approaches may have been used each month to calculate such items as overhead allocations, bad debt reserves, or inventory obsolescence reserves.
Furthermore, some steps may not have been completed at all, requiring surprise entries every few months to adjust for the missing entries. In short, combining a massive number of closing steps with a lack of organization yields a lengthy close and inaccurate financial statements.
Use Of Multiple Accounting Software Packages
If a company has several subsidiaries, it is a good bet that many of them use accounting software packages that differ not only from the corporate system but also from other divisions. Although each of these packages may operate quite well, it is likely that each one requires different procedures to operate and close at month – end. Thus, even if a company is slavishly devoted to the concept of enforcing procedures throughout the accounting department, the presence of different software at each location will probably result in multiple versions of the same procedures, one for each system in use.
Maintaining up – to – date versions of these multiple procedure versions is difficult and time consuming. Also, if the corporate accounting staff needs information about the detailed contents of a specific account at the division level, it typically must contact the division accounting staff and ask for the information, rather than accessing it through a computer; this delay adds substantially to the variance analysis portion of the consolidation process.
The organization of the closing process in a multi-division company can cause a significant risk of fraud. The problem arises when the managers of individual reporting entities are given management control over the accounting departments of their operating units. By doing so, they can influence the reporting of financial information to corporate headquarters, not only through outright fraudulent transactions but also by influencing the calculation of measurements used to report operational results.
Another problem with decentralization is that accounting departments at the division level must compile their accounting results and review and obtain local approval of the information before forwarding it to the corporate accounting staff for consolidation. This can result in an extremely long interval before the information ever arrives at corporate headquarters. It is a particular problem if there are multiple reporting levels, so that each successively higher level of accounting staff must wait for results from the lower – level entities before they can prepare their reports and forward them to the next – higher level of reporting entity.
Low Quality of Financial and Accounting Data
The corporate accounting staff may do a sterling job of organizing accounting information into informative and GAAP – compliant financial statements and still issue extremely inaccurate information. The problem is caused by incorrect transactional data at the point of data entry. This is caused by several problems, including poor user training, inadequate automated data checking by the accounting software, and a lack of procedures for basic transactions. The cost to fix these problems at the corporate level is high and adds substantially to the time required to complete the closing process.
Varying Charts Of Accounts
One of the most common closing problems with multi-division companies is mapping the disparate divisional charts of accounts into a central chart of accounts. This process is highly error – prone and also subject to considerable interpretation, because the definition of an account may vary considerably between the division and corporate headquarters. The result is not only mapping errors but also inconsistency in the contents of accounts from period to period, resulting in wildly variable trend analyses for various accounts.
Use Of Electronic Spreadsheets
The typical accountant loves the electronic spreadsheet; it is so simple to extract data from a general ledger, manipulate information in the spreadsheet, and use the results to enter adjusting journal entries back into the general ledger. However, this process requires manual intervention and is subject to errors caused by both data entry mistakes and incorrect spreadsheet formulas.
Another problem arises when the creator of an especially complex spreadsheet leaves the company, leaving no one who understands how it works. Some multi-location companies use electronic spreadsheets so extensively that there is no corporate accounting software at all — they just consolidate divisional financial results into a spreadsheet and use that as the foundation for all financial reports. Thus, excessive electronic spreadsheet use results in possible reporting errors, the introduction of manual labor into the closing process, and excessive reliance on specialized staff knowledgeable in spreadsheet use.
Multiple Report Formats
Once the corporate accounting staff has completed its consolidation of financial information, it may still require many days before it can issue financial statements, because company management requires so many versions of the same reports. Some reports are issued at the division level, others to senior corporate managers, others to the investing public, others to creditors and lenders, and so on. Creating so many variations on the same reporting package can introduce multiple days of effort to the closing process.
Linkage To Fraud
The longer the closing process, the greater the opportunity for fraud to be introduced into the closing process. For example, if a close is regularly completed in one day, there is no way for anyone to record late deliveries as revenue in the prior month, because the financials have already been published. Conversely, a lengthy closing period allows management to spend days pondering ways to favorably alter the reported financial results. Also, if the accounting staff at the corporate level is intent on presenting an excessively rosy picture of the company ’ s results, it can alter the financial information forwarded to it by the various company divisions, without the divisions even being aware of any changes being made.
Involvement Of Third Parties
If a company is publicly held, it must work with several third parties to issue its 10-Q and 10-K reports to the SEC. This includes outside auditors, attorneys, the corporate audit committee, and a firm that reformats and files the reports with the SEC. These entities all have their own resource constraints and resulting work schedules that may severely lengthen the duration of the filing process.
The main point to take away from this post is that the closing process initially appears to be a frighteningly complex and tangled mess through which the controller must painfully navigate — every month. By drawing answers of why the closing process is difficult to complete, seems you have a better idea on how to prevent those common problems so that you can fasten your closing process.