Closing the books on fastclose?
21 October 2016
On Friday we hosted the first of a number of round tables in our ‘Finance in FS’ series and had a really interesting session with attendees from across Banking and Insurance. The focus of the session was ‘time to report’, following our recent study of reporting timelines across major FS organisations (see here), and the discussion was opened by Thierry Garcia, Group Financial Controller of Societe Generale.
The emerging theme throughout the discussion was that there is limited benefit in announcing results earlier but that there is a real benefit in reducing the effort taken to close the books. Organisations are refocussing limited resources on providing more meaningful commentary within the annual report and higher quality management information to support decision making. It’s part of the drive across finance to be delivering value and helping to improve the business results – “looking forwards not backwards”.
Why close faster?
There is an intuitive logic that tells us that organisations should want to close their books quickly and report to the market as soon as possible. However, we heard from the roundtable that for most organisations it is more important to report at broadly the same time as their peers and therefore they do not want to significantly shorten their reporting timescales unless their peers do. Those that have succeeded in announcing their results significantly before their peers in the past have tended to then slowly increase their timescales and merge back into the pack. Research has shown that the time that organisations make their announcements has no correlation to share price.
The impact of increased regulatory requirements on the Finance function has been to make it significantly harder to report within the same timescales and therefore many of those that have invested in reducing their time to report recently have had to do so in order to stand still. With IFRS 17 around the corner for Insurers this is only going to continue.
How do organisations achieve a faster close?
In our experience, the biggest factor in achieving a faster close is a change in the deadline that management set. Reducing the time to report is partially policy driven and therefore dependent on management’s decision around materiality levels and size of provisions. Procedural adjustments are best practice to reduce the time to report. These include managing the timetable and enforcing discipline around the tasks of closing, working simultaneously on disclosures, and sequencing the work in the best possible way. That said, for many organisations the decision to close faster means working every waking hour for days on end or accepting the risk of a subsequent misstatement. Investing to streamline the process and removing the bottlenecks is essential to make that acceleration sustainable. What can we learn from our benchmark data?
A comparison of US vs European Banks vs UK banks showed that the US banks are significantly faster in reporting their results to the market (see graphic to the left, click to enlarge). This is partly possible due to a difference in what reporting to the market means: US firms typically report their results with a very abridged annual report, which is subsequently issued in far more detail.
European organisations, conversely, tend to report their results and issue their full Financial Statements at the same time, which means they have to go through the detailed governance before publishing, whilst US organisations publish a ‘flash’ report and go through the rigours afterwards and then reporting details.
Our recent study of time to report across major banks also showed that the biggest differences between leading and lagging organisations was in their entity reporting and final preparation of the report, not their consolidation process. This may be because organisations have typically invested in improving their consolidation process rather than local reporting or production of the annual report.
One organisation described the benefit for them that implementing a document management system had achieved. Allowing effective collaboration, the critical impact was that when a number moved in the financial statements, it was automatically updated throughout the document. They also drove a 30% reduction in the length of the annual report, through a focus on providing exactly what analysts need and no more. Others discussed producing much of the information, including the disclosures, prior to year-end for agreement by bo th Management and the Auditors and then revising this as required once the final numbers were available.
Is it worth the effort?
Given the limitation of resources and the ever growing change agenda, is focussing on a faster close the best use of effort? The consensus was “yes”, but not just to report earlier.
The focus should be more on accelerating the nuts and bolts of preparation so you can spend more time on analysis and explanation – ensuring the messages are appropriately communicated to stakeholders rather than merely shortening the timescales for the sake of it. The time to report can be a symptom of underlying inefficiencies within the process and therefore reducing the effort spent closing the books is worthwhile, even if the final report and announcement timescales do not change. Freeing up more time through reducing the effort involved in closing the books should enable a greater focus on driving better decision making.
The “art” of financial reporting is not in pulling the numbers together – this should be efficient and speedy. Time should be spent on ensuring the messages contained within the numbers themselves are understood in an age where disclosures are ever more complex and reports stretch to 100s of pages. Consensus around the table also was that too much time is spent by finance looking backwards and not enough looking forwards. Moving effort from cranking out the close and report to delivering insight is part of the solution.
So what’s the answer?
As we heard from the discussion, the real value is in reducing the amount of effort involved in closing the books rather than reporting timescales, through utilising technology and minimising waste in the process, to give organisations more agility to report when they want to and, perhaps more importantly, more time to focus on driving the business forwards.
If you didn’t attend the session, but are would like to receive further information or to join future events, please contact FSFinanceRoundtable@uk.pwc.com.
Upcoming topics in the ‘Finance in FS’ series are: Finance & Risk Alignment, Cost of Finance, Planning, Budgeting & Forecasting.
Christophe Desgranges | Partner, Consulting
Email | +44 (0) 7725 068 236