Fast Close E-Book

Steven M. Bragg

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 324

Veröffentlichungsjahr: 2009

Beschreibung

Praise for Fast Close: A Guide to Closing the Books Quickly "Steve captures the essence of the problems affecting the financial close process within corporations of all sizes; from the period close of subledgers and general ledger through financial reporting, and the relationship and interdependencies of governance, people and technology. A must-read for the corporate controller." --David Taylor, ACMA, MBA, VP Strategy, Trintech Inc. "Fast Close: A Guide to Closing the Books Quickly, Second Edition is a must-read for today's busy controllers. Steven Bragg points out everything that can be done outside the close that you just never realized didn't actually have to be part of the month-end close process! Very commonsensical approach!" --Kathleen Schneibel, mba, cpa, Controller/CFO for Hire, KMAS Consulting LLC "A well-executed 'fast close' can bring many valuable benefits to any company, from improving organizational performance to transforming accounting executives from financial historians to trusted advisors. In Fast Close, Second Edition, Steve systematically breaks down the steps required to achieve a fast close in both public and private companies, providing financial executives with tips, checklists, and a cost-effective road map to implement fast close procedures in virtually any company." --Matthew Posta, Esq., CPA, Vice President of Finance, Key Air, LLC FROM THE FIRST EDITION "This is an outstanding book in which Steve reveals his secrets to a fast close. Having personally experienced his (one-day) fast close for years and enjoyed the beneficial impact on my company, I highly recommend this book for all financial officers who desire to have a large, favorable impact on their company." --Richard V. Souders, President and CEO, Kaba Workforce Solutions

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

About the Author

Also:

Preface

Chapter 1 - Introduction

DIFFERENT TYPES OF FAST CLOSE

BENEFITS OF THE FAST CLOSE

LEGAL ISSUES IMPACTING THE FAST CLOSE

STEPS TO ACHIEVE A FAST CLOSE

SUMMARY

Chapter 2 - Your Current Closing Process

TRADITIONAL CLOSING PROCESS: BASIC

ADDITIONAL CLOSING TASKS FOR THE MULTIDIVISION COMPANY

ADDITIONAL CLOSING TASKS FOR THE MULTINATIONAL COMPANY

ADDITIONAL CLOSING TASKS FOR THE PUBLIC CORPORATION

PROBLEMS WITH THE CLOSING PROCESS

SUMMARY

ENDNOTE

Chapter 3 - Conducting a Review of the Closing Process

STEPS IN THE PROCESS REVIEW

PAYABLES PROCESS REVIEW

BILLING PROCESS REVIEW

INVENTORY PROCESS REVIEW

CASH PROCESS REVIEW

FINAL CLOSING PROCESS REVIEW

TOTAL DURATION OF THE CLOSING PROCESS

SUMMARY

ENDNOTE

Chapter 4 - Alter the Timing of Closing Activities

ALTERING THE CLOSING MINDSET

REVIEW AND CORRECT SUBLEDGER TRANSACTIONS THROUGHOUT THE MONTH

COMPLETE THE BANK RECONCILIATION EVERY DAY

REVIEW UNCASHED CHECKS

UPDATE THE INVENTORY OBSOLESCENCE RESERVE

DETERMINE THE LOWER OF COST OR MARKET

CALCULATE OVERHEAD ALLOCATION BASES

BILL RECURRING INVOICES

CONDUCT A PRELIMINARY COMPARISON OF THE SHIPPING LOG TO INVOICES ISSUED

REVIEW PRELIMINARY REBILLABLE EXPENSES

UPDATE THE BAD DEBT RESERVE

REVIEW PRELIMINARY BILLABLE HOURS

ACCRUE INTEREST EXPENSE

DETERMINE PENSION PLAN FUNDING

DETERMINE FLEXIBLE SPENDING ACCOUNT FUNDING

ACCRUE UNPAID WAGES

ACCRUE UNUSED VACATION TIME

ACCRUE TRAVEL EXPENSES

RECONCILE ASSET AND LIABILITY ACCOUNTS

CALCULATE DEPRECIATION

COMPILE PRELIMINARY COMMISSIONS

REVIEW FINANCIAL STATEMENTS FOR ERRORS

COMPLETE SELECTED FINANCIAL REPORTS IN ADVANCE

DEFERRED CLOSING ACTIVITIES

SUMMARY

Chapter 5 - Revise the Contents of the Financial Statements

ALTER THE MODE OF REPORT DELIVERY

STANDARDIZE REPORTS

ELIMINATE COST REPORTING FROM THE REPORTING PACKAGE

SEPARATE METRICS FROM THE FINANCIAL REPORTING PACKAGE

SUMMARY

Chapter 6 - Optimize the Use of Journal Entries and Chart of Accounts

ELIMINATE IMMATERIAL JOURNAL ENTRIES

STANDARDIZE JOURNAL ENTRIES

CONVERT TO RECURRING JOURNAL ENTRIES

CENTRALIZE USE OF JOURNAL ENTRIES

USE JOURNAL ENTRIES TO ACCRUE EXPENSES DELAYING THE CLOSE

AUTOMATE JOURNAL ENTRY POSTINGS

USE ACCRUALS ONLY FOR EXTERNAL REPORTING

DEFINE ACCOUNTS

STANDARDIZE THE CHART OF ACCOUNTS

AUTOMATE ELIMINATIONS OF INTERCOMPANY TRANSACTIONS

SUMMARY

Chapter 7 - Standardization and Centralization

IMPACT OF STANDARDIZATION ON THE CLOSING PROCESS

IMPACT OF CENTRALIZATION ON A MULTILOCATION ACCOUNTING DEPARTMENT

IMPACT OF CENTRALIZATION ON A SINGLE-LOCATION ACCOUNTING DEPARTMENT

INCORPORATING STANDARDIZATION AND CENTRALIZATION INTO ACQUISITION ACTIVITIES

SUMMARY

Chapter 8 - Closing the Inventory Function

CREATE AN INVENTORY TRACKING SYSTEM

IMPLEMENT CYCLE COUNTING

REDUCE THE AMOUNT OF INVENTORY

PROPERLY RECORD THE LOWER OF COST OR MARKET RULE

REVIEWING OBSOLETE INVENTORY

PREVENTING OBSOLETE INVENTORY

SUMMARY

ENDNOTES

Chapter 9 - Closing the Billing Function

BILL RECURRING INVOICES IN THE PRECEDING MONTH

COMPUTERIZE THE SHIPPING LOG

ELIMINATE REBILLABLE EXPENSE PROCESSING FROM THE CORE CLOSING PERIOD

ELIMINATE MONTH-END STATEMENTS

PRINT INVOICES EVERY DAY

TRANSMIT TRANSACTIONS VIA ELECTRONIC DATA INTERCHANGE

SUMMARY

ENDNOTE

Chapter 10 - Closing the Payroll Function

AUTOMATICALLY CALCULATE COMMISSIONS IN THE COMPUTER SYSTEM

SIMPLIFY THE COMMISSION STRUCTURE

INSTALL INCENTIVE COMPENSATION MANAGEMENT SOFTWARE

POST COMMISSION PAYMENTS ON THE COMPANY INTRANET

AVOID ADJUSTING PRELIMINARY COMMISSION ACCRUAL CALCULATIONS

USE A BAR-CODED TIME CLOCK

USE A WEB-BASED TIMEKEEPING SYSTEM

AUTOMATE VACATION ACCRUALS

MERGE SICK TIME INTO VACATION TIME

CAP THE AMOUNT OF VACATION TIME TO BE CARRIED FORWARD

SUMMARY

ENDNOTE

Chapter 11 - Closing the Payables

AUTOMATE THE MONTH-END CUTOFF

PAY BASED ON RECEIVING APPROVAL ONLY

AUTOMATE THREE-WAY MATCHING

REDUCE REQUIRED APPROVALS

USE NEGATIVE ASSURANCE FOR INVOICE APPROVALS

USE PROCUREMENT CARDS

HAVE SUPPLIERS INCLUDE THEIR SUPPLIER NUMBERS ON INVOICES

RECEIVE BILLINGS THROUGH ELECTRONIC DATA INTERCHANGE

REQUEST THAT SUPPLIERS ENTER INVOICES THROUGH A WEB SITE

AUDIT EXPENSE REPORTS

AUTOMATE EXPENSE REPORTING

LINK CORPORATE TRAVEL POLICIES TO AN AUTOMATED EXPENSE REPORTING SYSTEM

ISSUE A STANDARD ACCOUNT CODE LIST

LINK SUPPLIER REQUESTS TO THE ACCOUNTS PAYABLE DATABASE

AUTOMATE PAYMENTS FOR REPETITIVE PROCESSING

ELIMINATE MANUAL CHECKS

USE A SIGNATURE STAMP

IGNORE SUPPLIER INVOICES AND PAY FROM STATEMENTS

ISSUE STANDARD ADJUSTMENT LETTERS TO SUPPLIERS

SUMMARY

ENDNOTE

Chapter 12 - Closing the Cash Processing Function

ACCESS BANK ACCOUNT INFORMATION ON THE INTERNET

AVOID DELAYS IN CHECK POSTING

COLLECT RECEIVABLES THROUGH LOCKBOXES

INSTALL A LOCKBOX TRUNCATION SYSTEM

ACCESS ONLINE CHECK IMAGES FROM A LOCKBOX

CONSOLIDATE BANK ACCOUNTS

SUMMARY

ENDNOTE

Chapter 13 - Impact of Automation on the Closing Process

PRINCIPLES OF FAST CLOSE AUTOMATION

IMPLEMENT MINOR PROGRAMMING CHANGES ON AN ONGOING BASIS

AUTOMATE GENERAL LEDGER INTERFACES

INSTALL A WEB-BASED TIMEKEEPING SYSTEM

INSTALL A WORKFLOW MANAGEMENT SYSTEM

INSTALL CONSOLIDATION SOFTWARE

INSTALL A DATA WAREHOUSE

INSTALL AN ENTERPRISE RESOURCES PLANNING SYSTEM

SUMMARY

Chapter 14 - Closing the Books of a Public Company

OVERVIEW

CONSTRUCTING THE SEC FILING

QUARTERLY AUDITOR REVIEWS AND AUDITS

QUARTERLY LEGAL REVIEW

OFFICER CERTIFICATION

AUDIT COMMITTEE APPROVAL

EDGARIZING

SUMMARY

Chapter 15 - Controls for Financial Reporting

OVERVIEW

CONTROLS FOR FINANCIAL REPORTING

SUMMARY

Chapter 16 - Ongoing Improvements in the Closing Process

ONGOING IMPROVEMENT PROCESS

IMPROVEMENT MEASUREMENTS

SUMMARY

Appendix A - Comprehensive Closing Checklist

Appendix B - Fast Close Policies and Procedures

Appendix C - Soft Close Checklist

Appendix D - Year-End Close Checklist

Index

Copyright © 2009 by John Wiley & Sons, Inc., Hoboken, NJ. All rights reserved.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

eISBN : 978-0-470-48076-2

1. Controllership—Handbooks, manuals, etc. 2. Financial statements—Handbooks, manuals, etc. 3. Bookkeeping—Handbooks, manuals, etc. 4. Corporations—Accounting—Handbooks, manuals, etc. I. Title. HG4027.3.B733 2009 657’.2—dc222008054909

To Richard Souders,who always operates at warp speed.

About the Author

Steven Bragg, CPA, CMA, CIA, CPIM, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte & Touche. He received a Master’s degree in finance from Bentley College, an MBA from Babson College, and a Bachelor’s degree in Economics from the University of Maine. He has been the two-time president of the Colorado Mountain Club, is an avid alpine skier and mountain biker, and is a certified master diver. Mr. Bragg resides in Centennial, Colorado. He has published the following books with John Wiley & Sons:

Accounting and Finance for Your Small BusinessAccounting Best PracticesAccounting for PayrollBilling and Collections Best PracticesBusiness Ratios and FormulasController’s Guide to CostingController’s Guide to Planning and Controlling OperationsController’s Guide: Roles and Responsibilities for the New ControllerControllershipCost AccountingDesign and Maintenance of Accounting ManualsEssentials of PayrollFast CloseFinancial AnalysisGAAP Implementation GuideInventory AccountingInventory Best PracticesJust-in-Time AccountingManaging Explosive Corporate GrowthMergers and AcquisitionsOutsourcingPayroll Best PracticesRevenue RecognitionSales and Operations for Your Small BusinessThe Controller’s FunctionThe New CFO Financial Leadership ManualThe Ultimate Accountants’ ReferenceThroughput Accounting

Also:

Advanced Accounting Systems (Institute of Internal Auditors)

Run the Rockies (CMC Press)

Preface

One of the most common challenges for the controller is to close the month-end books and issue financial statements as fast as possible. The resulting statements are being demanded by corporate management, outside investors, and the Securities and Exchange Commission (SEC) (for public companies) on the shortest possible timelines. However, the closing process has traditionally been a slow one—several surveys reveal that the average company requires about two weeks to close its subsidiary’s books, followed by roughly another three weeks to roll up the results into corporate-level financial statements. Companies with more organized closing systems can reduce this process to about two weeks, and those companies with the best closing processes can reduce the entire interval to four days. These results represent a slight improvement in closing times over the past—few years, but there is no massive improvement trend. Thus, companies are clearly having a difficult time shortening the closing process.

This book walks the reader through the process of closing the books and creating financial statements faster much faster. The author uses the principles outlined in this book to issue financial statements for a multidivision company in one day and has been doing so for years. Some of the key improvement steps discussed in this book are:

• Shift the timing of closing activities out of the core closing period.

• Reduce the contents of the financial statements.

• Standardize and automate the use of journal entries.

• Standardize the chart of accounts.

• Centralize accounting functions.

• Adopt inventory tracking and cycle counting systems.

• Shift rebillable expense invoices out of the core closing period.

• Use a web-based timekeeping system for consulting staff.

• Streamline the commission calculation process.

• Optimize the approval process for accounts payable.

• Link supplier invoice accruals to the purchase order database.

• Layer consolidation software onto the existing accounting software.

• Integrate an ongoing improvement review into the closing process.

These bullet points are only a microcosm of the large array of changes recommended in this book. No single change will achieve a massive reduction in the closing interval. Instead, only by gradually working through the changes listed here, in the order presented within the following chapters, can one expect to arrive at a closing interval that may encompass as little as a single day.

This second edition of Fast Close includes two new chapters that address critical considerations in the closing process. Chapter 14 describes the lengthy and tortuous additional steps that a publicly held company must endure while it converts its financial statements into a quarterly or annual report that must be submitted to the Securities and Exchange Commission. The chapter notes a variety of techniques for compressing these additional activities. Chapter 15 describes a number of controls over the accuracy of the financial statements. This is a particularly important issue for controllers who want to ensure that there is sufficient documentation and transactional verification to reduce the risk of issuing misleading financial statements.

This enhanced second edition of Fast Close is the best possible guidebook for issuing accurate financial statements within the minimum possible time period. Enjoy the journey!

STEVEN M. BRAGG Centennial, ColoradoApril 2009

1

Introduction

Achieving a fast close is a process improvement project that requires the full attention of the accounting staff for a long period of time. Before committing to such a project, one should be clear about what type of financial close works best for a company’s specific needs, what kinds of benefits will result, and the general steps required to complete the close. This chapter provides answers to these questions.

DIFFERENT TYPES OF FAST CLOSE

Several variations on the fast close concept have appeared, causing some confusion about the nature of each one. The fast close is simply an acceleration of the standard closing process, resulting in approximately the same financial reporting package being issued (possibly somewhat stripped down). The focus of this approach is a careful examination of the closing process to strip out wait times, consolidate tasks, eliminate unnecessary functions, add transaction best practices, and selectively apply automation where necessary. It is a task in which an industrial engineer trained in efficiency improvements would feel quite at home.

The soft close is less labor intensive than a regular close, because it does not generate as much information. It is designed solely for internal corporate use, so its end product is only those management reports needed to run operations. With this reduced reporting goal in mind, the accounting staff can eliminate the use of overhead allocations. It may also be possible to stop some accruals and ignore the elimination of intercompany transactions, depending on the level of reporting detail desired. The soft close is most commonly seen in companies that issue only quarterly or annual reports to outside entities, leaving all other months available for the soft close.

The virtual close involves the use of a largely automated accounting system, one that can produce required financial information at any time, on demand. This approach is rarely used and only in the largest companies that can afford to install an enterprise resources planning (ERP) system that automatically consolidates and reports financial information. Also, the underlying transactions that feed into the ERP system must be essentially error free, so an accurate virtual close is really the result of a hefty software investment as well as years of continual process improvements. The financial reports resulting from a virtual close tend to be stripped-down versions of generally accepted accounting principles (GAAP)-compliant reports, because this approach avoids the need for such manual tasks as overhead allocation, accrual transactions, and the establishment of various reserves.

If achieved, a virtual close can be useful in fast-moving industries where financial results must be monitored frequently in order to make rapid-fire changes to a company’s tactical or strategic direction, or at least to identify problem areas for fast management attention.

BENEFITS OF THE FAST CLOSE

There are numerous benefits to achieving a fast close, which vary based on the perspective of the recipient—company management, outside investors, auditors, and the accounting department. These benefits are:

• Quicker access to financial information. Company management generally feels that the primary benefit of the fast close is having access to financial information more quickly, allowing it to take rapid steps to improve a company’s strategic and tactical position in the marketplace.

• Marketing tool. A company’s marketing staff can use the rapid issuance of financial information to trumpet the company’s openness to the investing public. This does not necessarily mean that the company will issue sterling financial results, only that it will issue results faster. Still, it implies some level of expertise on the part of the accounting department in processing transactions and compiling them into reports, and so may impart some level of comfort to investors in that regard.

• More time for financial analysis. Closing the books fast does not necessarily mean that one must issue financial statements sooner. An alternative is to spend additional time analyzing the preliminary financial statements in order to issue more complete notes alongside the financials at a later date.

• Improved processes. Because the fast close improvement process requires careful attention to process enhancement, there will inevitably be side-benefit improvements to many accounting processes, leading to heightened efficiency and fewer errors. Within the accounting department, this may be seen as the top benefit of the fast close. A variety of controls for financial reporting are discussed in Chapter 15.

• Improved control systems. Internal and external auditors appreciate the enhanced attention to control systems needed to ensure that information is compiled properly and fast.

• More time, period. Although some aspects of the fast close simply push activities into the period either before or after the core closing period, some actions are completely eliminated or at least reduced in size. This results in less total time required for the closing process, which can be used by the accounting staff for a variety of other activities.

Consequently, the wide array of fast close benefits results in multiple supporting constituencies—management, investors, auditors, and the accounting department.

LEGAL ISSUES IMPACTING THE FAST CLOSE

The Sarbanes-Oxley Act has made it more difficult to achieve a fast close. The problem is Section 302 of the Act, which requires formal management certification of the accuracy of the financial statements. Specifically, Section 302 requires that the financial statements of publicly held companies not contain any material untrue statements or material omissions or be considered misleading. Understandably, those signing this certification want to spend more time ensuring that the financial statements are indeed correct. Some recent surveys of the time needed to produce financial statements have indicated a slight increase in the time required since the passage of Sarbanes-Oxley, probably because of Section 302.

However, Section 409 of Sarbanes-Oxley requires that public companies disclose to the public on Form 8K any information on material changes in their financial condition or operations. This must happen within four days of the occurrence of a triggering event. This requirement calls for financial and operating systems that bring issues to the attention of management faster than might previously have been the case.

Finally, the Securities and Exchange Commission (SEC) has accelerated its requirement for the timely filing of quarterly and annual reports by publicly held companies. The rule change calls for a three-year decline in the reporting period to 60 days for annual reports and to 35 days for quarterly reports (down from 90 days and 45 days, respectively). This rule applies to domestic companies having a public float of at least $75 million and that have previously filed at least one annual report.

In short, corporate controllers and chief financial officers are caught between a rock and a hard place—they must file financial and operating information sooner but want to retain it in-house longer to ensure that it is correct. The solution is still the fast close—information is available quicker for filing requirements, while company management can still retain it for further review until the accelerated filing dates come due.

STEPS TO ACHIEVE A FAST CLOSE

Several steps are required to achieve a fast close, which are addressed in detail in the following chapters. They are listed in the following recommended order of implementation:

1. Reviewing the closing process (Chapter 3). The first step in achieving a fast close is to examine the current state of the closing process and determine the time required to complete each functional area (i.e., inventory, billing, payroll, payables, and cash processing, as well as final closing activities). It is useful to summarize the results of this investigation into a timeline that can be used to spot which segments of the closing process are particularly in need of improvement.

2. Altering the timing of closing activities (Chapter 4). A set of changes that are easy to implement and yet have a startling positive impact on the duration of the close is to shift many of the closing activities either into the preceding month or into the period immediately following the issuance of financial statements.

3. Revising the contents of the financial statements (Chapter 5). The close will take less time if there is less information to report. There are several variations on this concept, such as eliminating custom reports entirely, shifting to electronic modes of report delivery, and reporting some operating or metric information separately from the financial statements.

4. Optimizing the use of journal entries and chart of accounts (Chapter 6). Journal entries require excessive amounts of time, may be entered incorrectly, and do not always contribute to the accuracy of the financial statements. Thus, standardizing journal entries, eliminating inconsequential ones, and automating them can be of considerable assistance. Also, using a common chart of accounts or at least creating mapping tables will reduce the labor associated with consolidating results reported by subsidiaries.

5. Standardization and centralization (Chapter 7). If a company has multiple locations, the closing process will be nearly impossible to improve unless the controller pays considerable attention to the standardization of accounting transactions so that they are completed in exactly the same way in all locations. Even greater closing improvements can be attained by centralizing accounting functions for the entire company in a single location.

6. Closing the inventory function (Chapter 8). The topic of inventory makes many controllers shudder, because a combination of poor controls and large investments in this area makes the cost of goods sold an extremely difficult area to calculate, leading to massive time requirements during the closing process. This problem can be reduced by implementing tight inventory tracking and cycle counting systems, as well as by adopting better materials management policies to reduce the overall level of inventory investment.

7. Closing the billing function (Chapter 9). Generating month-end invoices may be the bottleneck operation during the month-end close. This problem can be reduced by shifting recurring invoices and the rebilling of expenses out of the closing period, electronically linking the shipping database to the accounting department, and ensuring fast completion of billable hours reporting.

8. Closing the payroll function (Chapter 10). The payroll function principally interferes with the closing process because employees are late in recording their billable hours, which can be resolved through the use of automated time clocks and Web-based time recording systems. There are also several ways to streamline the commission calculation process so it takes much less time during the core closing period.

9. Closing the payables function (Chapter 11). Waiting for late supplier invoices to arrive, as well as pushing those invoices through a Byzantine approval process can seriously interfere with the month-end close. There are several approaches for streamlining the basic approval process, while the intelligent use of expense accruals, coupled with the purchase order database, can eliminate the wait for late invoices.

10. Closing the cash processing function (Chapter 12). Some controllers like to wait until the bank statement arrives in the mail before issuing financial statements, so they can first conduct a bank reconciliation. The postal float on the bank statement can be two or three days, which directly delays the issuance of financial statements. This can be avoided through the use of online bank reconciliations, while several techniques are available for improving the speed of processing incoming checks.

11. Incorporating automation into the closing process (Chapter 13). There are several ways to use automation to improve the closing process, ranging from a series of small efficiency-related improvements to workflow management software, a data warehouse, consolidation software, and an ERP system.

12. Ongoing improvements in the closing process (Chapter 16). Although the preceding action items may have achieved a considerable improvement in the speed of the close, there is always room for improvement. Consequently, constant attention to the process flow and measurement of key metrics will ensure that the fast close remains fast.

There are two other chapters that do not have a direct bearing on speed of issuing financial statements. Chapter 14 uses many of the techniques described in previous chapters to compress the separate report filing process required of public companies by the Securities and Exchange Commission. Also, Chapter 15 describes an array of controls over the financial statement reporting process. Many of these controls can increase the duration of the closing process, but are critical for ensuring the ultimate accuracy of the financial reports.

The order in which improvements are listed here (and throughout the book) is intended to focus attention on low-cost, easy-to-implement changes that have a major and immediate impact on the speed of the close. Despite requiring considerable long-term effort, inventory-related changes are listed relatively high in the priority list, because the accounting staff needs to begin work on them as soon as possible in order to achieve any benefits within a reasonable timeframe. Automation improvements are listed near the bottom of the priorities, because they are generally very expensive, require considerable time to implement, and do not have a major impact on the duration of the closing process.

SUMMARY

Although the soft close and virtual close are available as alternatives to the fast close, most companies need to issue full-scale financial statements every month, which precludes the soft close. The virtual close requires considerable resources to achieve, and so is also not an option in most cases. Consequently, the focus throughout the remainder of this book is on the standard fast close, which presents considerable benefits to the implementing company.

The next chapter outlines the primary traditional closing steps required for a small single-location company, and then goes on to cover additional closing requirements for companies having multiple locations, international locations, and public reporting requirements. This information serves as a basis for the closing enhancement activities that begin to be addressed in Chapter 3.

2

Your Current Closing Process

Historically, controllers 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.

This chapter covers the basic tasks required to close the books, as well as the reasons why the closing process can be so excruciatingly tangled and difficult to complete.

TRADITIONAL CLOSING PROCESS: BASIC

Company managers usually want to see financial results for every month of the year, so there is a basic closing process for each of the 12 months. On top of that, public companies create more substantial quarterly financial reports for their Form 10-Q submissions to the SEC and extremely thorough ones for their annual Form 10-K submissions. Also, multidivision companies require additional steps to consolidate financials at the division level and at the corporate level. Furthermore, international companies must convert their financial statements into a single reporting currency. For now, a discussion of these added closing requirements will be shifted to later sections of this chapter, and this section will concentrate on how to close the books for a single-location private company.

As noted in Exhibit 2.1, the closing process follows multiple parallel paths, one for each of the functional accounting areas: payroll, invoicing, payables, inventory, and cash. These separate process flows also interact with each other; for example, nearly all accounts payable steps must be completed before one can roll new purchasing information into the fixed asset ledger or the overhead cost pools for subsequent allocation. Because of these interdependencies, some processing steps can be significantly delayed. Controllers frequently wait while additional information arrives from outside sources before they are willing to complete a processing step. For example, they want to have a bank statement in hand before conducting a bank reconciliation; also, they may not close the accounts payable function until all significant supplier invoices have arrived.

Exhibit 2.1 Traditional Closing Process

The following points contain descriptions of the most common closing steps for each of the functional accounting areas:

• Payroll activities. If a company’s payroll system does not produce paychecks on the last day of the month and include in those payments all time worked by employees through month-end, then some labor expenses are not being included in the financial statements. If so, the accounting staff typically spends a few days collecting time cards or similar documents from employees and calculating an accrued wage expense. They also must calculate the amount of accrued sick and vacation time and deduct from that figure any such time used by employees to see if accrual changes are required. Furthermore, they must extract from the payroll records the amount of any billable hours and forward this information to the invoicing staff for billing to customers. Finally, they use the payroll register from any payrolls run during the month to create one or more payroll journal entries to transfer payroll information to the general ledger; this last step may be automatic if the company runs its payroll in-house, or is compiled from paper documents if the company uses an outside payroll processing provider. Of all these activities, controllers sometimes ignore the wage and sick/vacation expense accruals, which can render the financial statements significantly inaccurate if wages are a large proportion of total company expenses.

• Invoicing activities. If a company issues recurring invoices for such items as periodic maintenance contracts, it typically issues them at the beginning of the month. A services company will also use billable hours information from the payroll staff and rebillable expense information from the payables staff to create invoices for services rendered. A product company will use shipping information from the warehouse (usually transmitted on paper) to create invoices for recent shipments. If shipment information has a history of being inaccurate, an accounting or internal auditing person may also be sent to the shipping dock to manually review the shipping log to ensure that all shipped items have been billed. Also, if services hours are earned but not billed, the accounting staff creates an accrued revenue journal entry. The controller also consults with the collections manager to update the reserve for bad debts, while accounting clerks create a spreadsheet listing commissions earned by each salesperson; the sales manager usually reviews this commission report and modifies it based on changes in commission splits, invoice allocations, and other criteria. The accounting staff modifies the commission report based on these changes and books a commission journal entry. Of all these activities, controllers tend to ignore regular updates to the reserve for bad debts, which places the company in the dangerous position of running out of reserves in a subsequent month and having to record an unusually large bad debt expense to rebuild its reserve.

• Payable activities. Although payables is not a difficult area to complete, controllers have a tendency to delay the closing in order to receive every last supplier invoice related to the period being closed. The more careful ones do this by obtaining a copy of the receiving log from the warehouse and checking off all invoices against it, waiting until every received item has a matching invoice. Once completed and rolled into the general ledger, this information is used to populate the fixed asset ledger and calculate depreciation, which in turn is also posted to the general ledger. Also, the completed payables information is rolled into cost pools for allocation to inventory. Thus, the accounts payable area is a significant bottleneck for key downstream closing activities.

• Inventory activities. Inventory is the area that gives controllers the most heartburn, because there is a risk of considerable inaccuracy in the reported figures. To prevent this problem, they tend to take extra time to ensure that the month-end cutoff has been properly completed and the inventory physically counted and valued. These steps can take many days, and so (like accounts payable) can be a bottleneck in the closing process. Additional closing steps are writing off inventory based on the lower of cost or market rule, as well as adjusting the reserve for obsolete inventory. These last two steps are frequently skipped by controllers, which is dangerous, because recording large expenses for these items only at year-end can be quite a shock to senior management and has led to the firing of more than a few controllers.

• Cash activities. Conducting a bank reconciliation seems like an easy closing activity, but it tends to be considerably delayed because some controllers insist on waiting until a physical bank statement arrives in the mail. Others delay the reconciliation until some time after the close has been completed, which underreports the amount of bank service fees listed on the bank statement. An added step regularly followed by more conscientious controllers is to regularly review uncashed checks and contact the payees to remind them to submit the checks to a bank for payment.

• Additional activities. The primary closing activities were noted earlier in Exhibit 2.1. However, other steps are necessary that will be specific to the circumstances of individual companies. For example, if there is outstanding debt at month-end, someone must calculate the amount of accrued interest expense. Also, if a company has entered into a royalty arrangement in exchange for its use of product designs, patented processes, and so on, then the royalty expense must also be accrued. Furthermore, there may be changes to the equity accounts caused by stock issuances, buybacks, or a company’s recording of changes in its ownership interest in other entities, all of which require additional journal entries. Finally, a closing activity applicable to multiple functional areas is the detailed account reconciliation; this involves determining the exact contents of key accounts, such as accounts receivable and payable, prepaid expenses, and a variety of liability accounts. Listings of the contents of some accounts are commonly kept on electronic spreadsheets.

Thus, it is evident that many tasks must be completed in order to produce financial statements even for a relatively simple corporate configuration—one location with no public reporting. The situation can be made more difficult by introducing in the next section the additional tasks required to complete a close for a multidivision company.

ADDITIONAL CLOSING TASKS FOR THE MULTIDIVISION COMPANY

The corporate controller of a multidivision company will review the previous section and then loudly opine that the real bottleneck operation is missing—the forwarding of completed financial information from each division, which can take many days. The problem is exacerbated if the division controllers have no sense of urgency regarding the close and prefer to issue thoroughly reviewed and approved financial packages to the corporate accounting staff, sometimes many weeks after the reporting period. The problem is even worse if there are multiple levels of corporate reporting, so one company reports its results to its reporting parent, which reports to its parent, and so on. This arrangement can cause massive delays in the reporting process.

An additional issue for the multidivision company is mapping the charts of accounts (COAs) of all the reporting divisions to the corporate COA. If done manually, there is a considerable risk of mapping inconsistency from month to month, which can play havoc with subsequent variance analysis tasks. This is a particular problem for companies owning disparate business entities whose operational requirements really do require variations from the corporate COA.

Another issue is the identification and elimination of intercompany transactions. This is a significant task for companies whose business operations are heavily integrated both upstream and downstream. For example, a tire manufacturer that owns the raw rubber source, as well as retail tire outlets, must eliminate from its reported financial results any transactions between the various operating divisions prior to the final sale to customers. This is a particular problem when the various divisions have freestanding accounting systems, because there is no automated approach for linking a sale on the books of one division to a receipt on the books of the division to whom the sale was made.

A final problem is analyzing and correcting the information supplied by the divisions. Because there are likely to be differences in the quality of information provided by each division, there is a reasonable chance that corporate-level variance analysis will uncover problems in the underlying transactions. Because the corporate accounting staff rarely has access to each division’s individual transactions, it must forward investigation requests to the divisions and wait for them to conduct a review, which adds time to the closing process. Also, if a correcting entry is required, the corporate staff usually makes the change in the corporate books, which means that the corporate records of the division’s results now vary from the division’s in-house accounting records, requiring a periodic reconciliation to bring the two sets of books into alignment.

Thus, waiting for the financial results of subsidiaries, consolidating the information, eliminating intercompany transactions, and investigating and correcting problems in the consolidated results can add multiple weeks to the closing process—possibly several times more than are required for a single-location entity to report its financial results.

ADDITIONAL CLOSING TASKS FOR THE MULTINATIONAL COMPANY

A multinational company (MNC) is, by definition, a multidivision company, so all of the additional closing tasks noted in the previous section also apply to the MNC. In addition, the MNC must convert the currencies in which the financial results of its divisions are reported into the reporting currency of the corporate office. Depending on a variety of criteria, the corporate accounting staff may use one of two translation methods (the current rate method or remeasurement method)1 to make this conversion, and quite possibly use a different one for each division. The current rate method requires the retention of period-end exchange rate information for conversion purposes, whereas the remeasurement method requires the retention of additional exchange rates from earlier periods.

ADDITIONAL CLOSING TASKS FOR THE PUBLIC CORPORATION

The publicly held company has considerable additional reporting tasks beyond those of a private firm. The SEC requires a specific reporting format (as detailed in its Regulation S-X) for financial statements. In addition, the annual 10-K and quarterly 10-Q reports require considerable additional disclosures. These reports are subject to intense SEC and investor scrutiny, so companies tend to spend lengthy periods reviewing their contents prior to issuance. If the underlying financial statements have been completed relatively quickly, the importance of issuing accurate 10-K or 10-Q reports leads many companies to still issue these documents only at the last minute, thereby giving them more time for document review.

The SEC requires public companies to file their annual 10-K reports within 60 days of year-end and their quarterly reports within 35 days of quarter-end, although slower reporting requirements are still acceptable for companies having a public float of less than $75 million (their reporting requirements are 90 and 45 days, respectively).

Exhibit 2.1 showed the basic closing tasks for a single-location company. Having just covered the additional reporting intricacies of multidivision, multinational, and public companies, the additional closing steps required by these entities are noted in the flowchart in Exhibit 2.2. A more comprehensive treatment of public company reporting requirements is located in Chapter 14.

PROBLEMS WITH THE CLOSING PROCESS

Exhibit 2.2 Closing Tasks for the Complex Enterprise

This section addresses some of the more common problems associated with the closing process. Solutions to these problems are discussed in subsequent chapters.

• Management perfectionism.