Financial Controlling vs Business Controlling

I am the CEO of Advantage Advisory, company established in the bowels of former Soviet country of Georgia and rapidly expanded to CIS, EMEA area and helped over 200 companies to find their new voice and new purpose.

Controlling is the key to informed, cautions and well-reasoned decision-making process.

I will use this Medium to share some of my experiences and answer questions of people who might be looking for guidance in their professional journey.

The reason why I have decided to address confusion concerning these two very distinct roles is because of several job posting that I found on LinkedIn that was advertised as Business controlling role but it clearly had more to do with financial controlling (opposite is often the case too).

The reason which makes me somewhat qualified to talk about both of these roles is first of all my 15-years of experience in leading finance roles, as well as my professional qualifications: I hold MBA from CEU business school and have been trained by General Electric to be all around badass Finance Guy. As a part of multiple engagements and transformation projects overtaken during my career I have served on both roles of a financial controller (FC), a business controller (BC) and also have been the one who managed these functions. I have built finance functions end to end and from top to bottom in international, cross-border and cross-industry operating corporations.

In my practice, I have seen 3 main types of role concentrations for controlling, financial controlling and business controlling functions. Here is the breakdown of these (we will try to go through them one by one):

• US Definition
• European
• Developing Countries

Controlling in the nutshell — Will Come back to this cycle in my next post about performance measurement.

1. US Definition of Controller’s function

U.S. Has a more unified definition of the role and US corporations merge both Financial and Business Controlling functions under one umbrella function of “Controller”. The controller in the US corporate setting is someone who is tasked with the following:

• Protecting shareholder equity,
• Protecting assets,
• Reporting on taxes and producing statutory reporting for IRS.
• Producing true and prudent financial statements in compliance with US laws and reporting guidelines defined by US GAAP and SOX. In some cases, the controller might be tasked to produce IFRS statements however this is only required in case when the US Company or it’s subsidiary is listed in one of the overseas stock exchanges (or for consolidation purposes).
• The controller in the US corporation is also tasked to run a statutory reporting for a number of regulatory bodies (Securities & Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Federal Reserve System (“Fed”), Federal Trade Commission (FTC), Federal Deposit Insurance Corporation (FDIC), Financial Crimes Enforcement Network (FinCEN), Financial Industry Regulatory Authority (FINRA) and others). Depending on the type, scope and model of the business, the controller might be required to produce statutory reports for one or several of these regulatory bodies.
• Accounts consolidation — This is the task which becomes needed in case if the company has multiple fully or partially owned subsidiaries and daughter companies. Different reporting requirements may apply to overseas related entities.

2. Western European Definition of Financial Controlling and Business Controlling Functions

In most of the Western European companies, we see two controlling functions: Financial controller and Business controller.

2.1. Financial Controller in EU, EEA & the UK

Financial controller’s primary tasks are more accounting and accountancy related and could vary in complexity depending on the company’s business model, the scope of business, corporate structure and regulatory environment. Many of the companies have a very vague scope of works when they start recruiting for the financial controller so here we try to clarify what exactly may fall among the duties of the person tasked with the job.

Tasks of the financial controller in EU, EEA and the UK could include but are not limited to:

Financial Controlling Cycles — Credit Globalgbconsulting

• Data verification and validation of the financial information retrieved from business systems for reporting purposes (This part of the function falls under a true and prudent accounting principle.),
• Protect shareholder equity and company assets,
• Preparation of tax report or verification of the validity of tax reports prepared by accountants,

Sometimes tax reporting is outsourced to third parties, however financial controller should still check tax reports and access the validity of reasoning /argumentation* used during application of certain tax rules and rates.

• Recognizing business units of the organization and identifying appropriate controlling standards,
• Identify and mitigate operational and reporting risks**.
• Eliminate ways that might be used for criminal misconduct,
• Report company financials in compliance with the local tax code, local GAAP (If such standard is adopted) and in some cases IFRS too.
• Companies that have US-based fully or partially owned subsidiaries, and companies that are owned by US-based mother companies are required to produce their accounts according to the US GAAP and in compliance with SOX.
• IFRS reporting in the EU is only mandatory for publicly traded entities (companies that are listed and traded in one of the European stock markets), however companies might independently and voluntarily produce their financials according to IFRS if: the company is owned by number of Non-EU investors, company is planning for M&A with other international entity or in case if company is planning to get listed. It is up to the financial controller to perform selection of appropriate /applicable IFRS chapters and perform accounts mapping for regular reporting purposes.

2.2. Business Controller in EU, EEA & the UK

Business controller in the European setup is a bit different kind of animal. The business controller serves as a business partner, and support to the CEO, COO and CFO. In many organizations business controller works in tandem with COO in order to achieve better performance results, improve profitability, relieve stress on COGS and margins.

This makes the business controller more concerned with operational matters than compliance, tax or accounting practices. P&L ( Profit and Loss statement) becomes a key driver and primary measurement tool for BC to assess overall performance, identify business drivers, benchmark business processes against relevant KPIs, identify organizational blind spots to curb inefficiencies and promote business process optimization.

As an all-seeing eye of executive management the business controller operates cross-functionally and :

- Has superb analytic skills, able to digest complex technical data with ease,

- Understands, maps and improves upon business processes,

- Knows all about information flows and is capable of working with IT development teams to structure the flow of information to achieve a desired output,

- Is a master tool-maker — is able to develop business controlling tools from scratch based on existing systems.

To summarize, task s and responsibilities of the business controller in the European setup could include and are not limited to following:

• Establish and improve upon existing management controlling and reporting practices,
• Identify, map and analyze business processes as well as corresponding KPIs,
• Standardize and improve the business controlling process. Create dictionaries, manuals and FAQs to ease the role’s performance cross-functionally,
• Create a system which permits the organization to achieve 4 primary goals: 1. Reduce cost, 2. Increase efficiency, 3. Stey ahead of the game and make informed decisions, 4. Identify, map and mitigate internal and external risks***.
• Build data processing and data management tools — a semantic layer in case if data is coming from multiple sources and a reporting layer for easy access as well as data visualization.
• Produce timely reports, challenge management and be vocal.

There are plenty more functions that could land on the business controller’s lap and if any of these comes you your mind feel free to comment and ask questions about it (or criticise me for not including it in this shortlist).

3. Controllers in Developing Countries

The role and function of business and financial controllers are received and interpreted differently in various developing countries and regions. These definitions (interpretations) of the roles are aligned with each other and most of the managers and executives in these countries do not see these roles as either financial or business (functional) support, instead, they associate the roles more closely associated with the operational and financial oversight, such as an auditor or revisor.

Most of the companies operating in developing economies will have either finance manager or an accountant handling the company’s financial controlling needs and we would not see the well-formulated role of financial controller, unless the company is operating under a corporate umbrella of US or European corporation.

Obviously, there are plenty of modern corporations in developing countries that have well defined financial management structure and these companies either subscribe to the US or European model of Financial and Business controlling and reporting practices, although these cases are very rare.

Here are several reasons why the majority of companies operating in developing economies do not have well defined financial controlling roles:

• There is no need — Many of the developing countries have failed to launch a stock exchange, as a result of this the county never faced the need to establish regulatory bodies for publicly listed companies and have not created special legislation that would apply to listed companies. Due to loose regulatory oversight and inexistence of controlling bodies the need to have a dedicated financial controller has never actualized.
• Ignoring Corporate Governance Guidelines — Modern day European and American interpretation of financial controlling role apart from local and regional legislation is loosely based on OECD’s corporate governance principles. Many of the developing economies that actually have vouched to implement these principles, on one hand, do not really understand what these principles imply or do not want to complicate their existing accountancy system to a degree where the majority of proprietors will not be able to comply to the rules. (There is obviously, easy systematic solution for this problem, albeit unstable and short-sighted governments of the developing world prefer to not initiate reforms that might potentially result in them losing some “side revenue” and votes).
• Most of the developing world has very straightforward and simple tax systems, not littered with the legacy rules and clauses, this means that less time and human resource is required for the company to comply to tax, accounting and reporting rules. The simplicity of tax systems in developing countries is one of the main reason why standalone financial controllers are not really needed.

This is all good and peachy you might ask, but what about business controllers? — Well, mostly in the CIS region (Russia, Ukraine, Kazakhstan, Georgia, Azerbaijan and Armenia) I have worked with companies who hire “Economists” who essentially perform the business controlling function.

Should be noted that the role of the Economist in corporations that operate in developing countries is not as influential as in the European setup and it only encompasses very rudimentary technical tasks and serves more as a support to accounting rather than standalone business function.

4. Summary

Following the definitions that have been provided in this painfully long article, I’ll try to summarize both business and controlling functions in a brief table where you can see similarities and differences of these functions.

4.1. Summary — Business Controller

• Operationally involved; Works in tandem with CEO, COO and Managers
• Serving as a general business partner and operational support
• Technically sophisticated, is well versed in IT
• Cross-functional player
• Has strong foresight and is future driven
• Has a good grasp of business processes
• Strong profit orientation
• Understands markets and influences
• Is a business planner
• Is analytic
• Is able to design financial as well as operational performance measurement systems and match them with corresponding KPIs
• Is a change and transformation leader
• Is challenging pre-conceptions, assumptions and status-quo
• Serves the function of operational oversight

4.2. Summary — Financial Controller

• Works in tandem with CFO, Chief Accountant and Finance Manager,
• Serving as finance, tax and compliance business partner
• Is concerned with validity, completeness and prudence of financial information
• Is a cross-functional player
• Is highly analytic and oriented to mitigate both internal and external risks
• Has an excellent understanding of the organization’s financial architecture
• Oriented to design a strong system of checks and balances
• Understands reporting standards such as IFRS, GAAP, SOX, IPSAS
• Can work with legal counsel to structure company’s tax endeavours
• Can interpret the tax law, provide and challenge argumentation
• Is able to design financial as well as operational performance measurement systems and match them with corresponding KPIs
• Is a change and transformation leader
• Is challenging pre-conceptions, assumptions and status-quo
• Serves the function of financial oversight

Hope this article was interesting, informative and shed some light on questions that you might have about these roles. In case if you have questions or comments please leave me a comment and I’ll get back to you asap.

For a closer engagement please feel free to add me on LinkedIn https://www.linkedin.com/in/akublashvili/ and send me a DM in case if I can be helpful for your cause.

Here are some definitions that I wanted to underline in the context of roles described above.

Tax Reasoning / Argumentation * — Judgement or decision made by tax accountants during application of certain tax rules and rates mostly because the definition provided by local tax code was ambiguous or incomplete. Argumentation is also required whenever the object of tax filing is operating under a bilateral tax agreement, a free trade agreement and single market/single economic zone rules.

Reporting risks** — These risks in most cases are related to either the absence or misfiling of the statutory reports. The relevant authorities might give a corporation a chance to fix mistakes in a timeley manner and issue a formal warning, albeit in the most cases authorities issue fines and sometimes demand seizure of operation until the filing errors are being resolved or accrued fines paid. The degree of the risk here mostly depends on the law and the level of hostility of relevant governing authorities.

Internal and external risks*** — Any risk that can result in material losses or damages as a direct result of actions faced by a company from within its organization and arise during the normal operations of the company. These risks can be forecasted and mitigated with some reliability, and therefore, a company has a good chance of reducing internal business risks. External risks are driven by factors and players that have no direct influence over the company’s operations or conduct.