Achieving A Best-Practice Financial Consolidation

Talk of task automation in finance is rife, with Robotic Process Automation (RPA) a trending topic in forums and discussion groups. However, what is often overlooked are improvements that can be achieved in the key financial processes.

One of these key processes is financial consolidation. The need to publish group accounts has been a regulatory requirement around the globe for longer than most of us care to remember. The accounting rules often differ depending upon the country and standards followed. However, the financial consolidation process is the same throughout.

Nonetheless, for many organisations, this process is far from being efficient and effective. For those, achieving a best-practice process could reap significant benefits.

Fundamental principles

Not a week goes past without a financial scandal hitting the news. This has resulted in an increased focus on the role of management and the auditors. To discharge their responsibilities, directors and senior management need to be confident in internal controls and related financial and business reporting. In turn, they need to provide evidence of this to the auditors.

A fundamental principle is the need for integrity and control of the record-to-report (R2R) process. It applies from the recording of underlying transactions in the ERP/accounting system, through to the final accounts that are presented to stakeholders and filed with regulatory authorities. Group accounts are not required by all organisations. However, where they are, financial consolidation forms an integral part of this R2R process.

A best-practice approach to financial consolidation will provide the internal controls to ensure the integrity of this process and provide the means to demonstrate this to the auditors. It will be cost efficient and reduce risk of error.

Improving cost efficiency

As mentioned, the finance team is under pressure to be cost efficient. Automation of low-level manual tasks is a first step in achieving this.

What are the attributes that lend a task to automation? A high level of defined, repeatable steps and rule-based calculations. If we break the financial consolidation process down into the individual tasks, we see that they are perfect candidates for automation:

• Data loading – the task to extract, transform and load data from underlying data sources that can be performed multiple times each period.
• FX translation – taking local currency values and translating to Group reporting currency using calculations based on various rates; historic, average, closing, opening etc.
• Intercompany eliminations – the removal of Group trading, loans, asset transfers and profit in stock, all using defined, logical rules.
• Investment eliminations – the removal of share capital, share premium, reserves based on defined rules.
• Data checks – to ensure integrity and accuracy of data loaded and/or entered. For example, does the balance sheet balance? Are intercompany differences within tolerable limits? These checks use logical, defined rules.
• Local and Group adjustments – to reflect local to group GAAP or reporting re-classifications. There will be cases where these are recurring or have some logic that would enable automation.
• Report assembly – the production of report packs and/or presentations to external stakeholders. This ‘final mile’ of finance requires the formatting and reporting of data and information already held elsewhere with additional narrative, output to various forms of media.

Whilst each of these individual tasks are not time-consuming in isolation, when combined they are significant and occur at a time when the pressure on finance as at its most intense. A best-practice approach is to automate these tasks as far as possible.

Reducing the risk of error

Whilst improving cost efficiency is important, it cannot be at the detriment of accuracy or risk of error. As we have all seen, reporting errors and internal control weaknesses can have a huge negative impact on an organisation.

The most frequent cause of error is a failure of logic within the consolidation model that goes unnoticed. Another cause is human error during the consolidation process itself. A best-practice approach to financial consolidation should seek to address these issues.

To help the group finance team to reduce risk of error, they require visibility and control. This allows them to monitor tasks and provides a mechanism to oversee the process. Of course, security is a major consideration, making sure that sensitive data and information can only be accessed by those who have authority.

We should also not forget the need visibility of the data from loading to final reported numbers. A detailed audit trail is key to providing evidence of reporting integrity to internal stakeholders and external auditors so that they can discharge their responsibilities.

If we move away from day-to-day operations, it is critical that the model maintenance is documented and controlled. The model should be easily maintainable, preferably managed within the finance team, to cope the need for inevitable changes.

Other considerations

There are other important points to consider when seeking to achieve a best-practice process. Firstly, reporting will extend beyond the P&L and balance sheet. An indirect cash flow will complete the three primary statements. To calculate this will necessitate the use of other data, such as asset movements. This information may be directly available from underlying systems or could be derived using logic on data loading. Alternatively, if it is buried at transaction level, it may require manual entry.

There may also be a requirement to collect, consolidate and report non-financial data. An example of this could be headcount. This data can be used in isolation, to calculate KPI’s or perform allocations. And, of course, no consolidation would be complete without notes to the accounts, all of which need to be consolidated and validated to the primary statements.

The role of technology

Organisations ordinarily start by developing an Excel model for financial consolidation. There is no reason why Excel cannot be used for this purpose as it has strong modelling functionality. However, there comes a point where the consolidation process becomes too complex and time consuming and, thus, cost inefficient and high risk.

When seeking to deliver the cost efficiencies, reduce risk and address the other considerations detailed above, the underlying technology platform has a huge part to play in delivering a best-practice financial consolidation. Technology enables the automation of tasks and provides the tools to reduce the risk of error. Also, we should not discount the agility to change the model as and when required.

All leading consolidation solutions will deliver the capabilities set out above as standard. Some solutions are consolidation focused, with capability that reflects this. CPM solutions also provide financial consolidation functionality, with planning also being delivered on a single technology platform. Regardless of your requirements, there is a technology solution out there that will support a best-practice financial consolidation process for your organisation.

Next steps

There is going to be increasing pressure being put on management and auditors to ensure the integrity of financial reporting. This will come from inside and outside of the organisation.

This pressure will, inevitably, be transferred onto the finance team to provide a cost-efficient solution that also reduces risk of error. Now is the time to transform what you currently do and achieve a best-practice financial consolidation.