Typical challenges and best practices in financial consolidation
We have been working with financial consolidation for 10 years (including 7 years in Big4) and we have identified top challenges most organizations face. Those can result in longer reporting cycle or even loss of money. We bring you hereby Top 5 financial consolidation challenges and best practices how to avoid those risks.
Intra-group transactions reconciliation
Challenge
In each reporting period accountants, controllers and CFOs need to deal with intra-group reconciliation. Most of the companies (even groups with over 100 subsidiaries) are doing the task through email. This approach has many risk factors predefined — misunderstanding the email, changing the figures after reconciliation and typo errors. All this makes the process longer and increases workload in consolidation’s final phase where all errors will come up. This is a manual process that is inefficient and has usually low quality.
Best practice
Monitored and automated reconciliation process decreases a magnitude of risks. If all the process is done in a controlled environment where software is checking correspondence before submission to the consolidation then the time saving can be up to 70%.
Equity reconciliation
Challenge
Second data integrity risk is equity reconciliation. As we know, many of the companies are using spreadsheets for financial consolidation that means there is no historic data when you report a new period. At the same time the accounting system, from where the data is collected, has opening balances and those can be changed after the last period reporting. This results with errors in consolidated owner’s equity (i.e. some movements are recorded as current year results instead of last year’s correction).
Best practice
Together with our clients in Rephop we have seen that equity reconciliation and equity movements reporting is crucial for each reporting period to get precise results. This can be done easily in proper consolidation software but you can design it to spreadsheet model as well.
Data collection
Challenge
As we said before, most of the companies are using spreadsheets for reporting process (some researches say even 86% of companies). This approach can be real data integrity risk. Spreadsheets are good because everybody knows how to use it and you can change or edit almost everything. This freedom is also an obstacle. Usage of changeable format for reporting means a possibility for data manipulation by CFO or controller. Some companies have strict rules that do not allow different reporting but the risk still remains.
Best practice
The only solution to avoid such risks is fully managed consolidation and reporting software. This solution has predefined data model that is saved in a database and each subsidiary can map their data with the model. Additionally, the solution decreases the time for data transformation of each subsidiary’s accountant.
Historic eliminations
Challenge
Each group has experienced business combinations or asset transfers. Those transactions (goodwill, investment, profit from the sale of fixed assets etc.) should be eliminated over long time period. To remember what happened 10 years ago is challenging. In each reporting period CFO or controller should remember all historic transactions and make eliminations accordingly. In some cases there is a need to make depreciation outside the accounting system due to different accounting principles in group and subsidiary. All this makes reporting period longer and allows mistakes.
Best practice
If a group is using spreadsheets they can make a separate master file where all this data is managed and collected. Then the minimum continuity is ensured but each reporting period requires still a lot of manual work. If proper consolidation software is used then all this is handled by the software. Our clients have said that after implementation of consolidation software they have a better overview of historic eliminations and the process is faster due to automatic eliminations.
Historic data consumption
Challenge
Reporting is not for reporting. Stakeholders need this data for the decision-making process and they need to compare historic data with current results. Our experience shows that spreadsheet users have different periods in different files that mean the comparison between periods needs manual data calculation and collection. This is time-consuming and allows mistakes.
Best practice
We have seen that spreadsheet users rarely have a separate management-reporting file where they collect all reporting periods’ key figures that can be read consumed by the management. This is a step forward for proper data presentation and consumption but it requires manual work. Additionally, it limits the accessibility of financial data. Again the best solution is consolidation and reporting software that has been designed to handle the reporting automatically. Leading providers are allowing the access to the data from every device and location.
Madis Lämmergas
CEO of Rephop
madis@rephop.com
www.rephop.com
