Improving quality of financial reporting: Analytics can help
Financial executives face constant pressures to close faster, report earlier and provide more information to investors, shareholders, lenders and boards. The quality of financial reporting cannot be compromised, as regulators and investors have zero tolerance for errors or restatements of financial results.
What are the financial reporting challenges?
- Financial reporting requirements are complicated, despite ongoing projects on simplification and convergence. U.S. and international accounting principles are complex and constantly changing, and they must be interpreted and consistently applied across organizations and from period to period.
- Size and diversity of operating units increases the challenge. Many companies have multiple operating units in different locations with different systems, processes, languages and currencies. Even small, privately held companies could have multiple products and systems.
- Regulatory oversight takes many forms. No financial executive wants to be subject to comments or compliance audits from the U.S. Securities and Exchange Commission (SEC). Such regulators are applying analytics to detect irregularities in reported data. The SEC's Accounting Quality Model is just one example of a regulator using company information to monitor financial reporting.
- Finance staff qualifications are critical to the quality of financial reporting. Employees must have appropriate education, experience, training and supervision, as well as be able to work together to create an effective system of internal control over financial reporting. Organizations of all sizes need clearly defined roles and segregation of duties for financial oversight.
- Technology is constantly changing. Smartphones, tablets, wireless access, networks, portals and the cloud have changed how the finance industry uses data. Accounting processes are increasingly automated, providing real-time visibility into transactions and dashboards that eliminate the need for spreadsheets and reporting packages. Although technology can provide faster and more accurate reporting, systems must be designed and maintained to avoid internal control risks. Outdated systems and software can be a major obstacle to financial reporting.
How can analytics help?
It is critical that data is complete, errors are caught, fraud is prevented and detected, and systems are operating effectively. Analytics can provide a framework for evaluating financial and operational results at period ends and between reporting periods, thereby improving the quality of financial reporting.
- Variance analysis should be performed consistently, both at operating unit and consolidated levels, with set parameters for investigating variances. This analysis can be manual, automated or a combination of the two. Finance staff should understand the role this internal control has in creating accurate financial statements. Different types of analyses should be performed, including balance sheet, income statement, cash flow, budget versus actual, actual versus actual current period and prior period by month, quarter, year to date, and trailing 12 months. Material variances should be the focus for financial reporting, but less significant variances can indicate internal control issues.
- Nonfinancial data and forecasts can be used to ensure that financial results are accurate. Finance should maintain ongoing dialogue with personnel in areas like sales and human resources. Using company-wide operating information, like new product launches or compensation plans, as part of analytical reviews before the books are closed can ensure that financial results are reasonable.
- Peer group metrics and benchmarking are another way to analyze results. In addition to providing important strategic and competitive data, this analysis can indicate inaccurate or fraudulent financial reporting if metrics are out of line. Common metrics include ROA, ROI, EBITDA, same-store sales, inventory turnover and accounts receivable aging. The SEC compares financial results by SIC code as part of its reviews, and auditors compare a company's financial results to those of peers and the overall industry to identify areas of audit focus and risk. Financial executives should use peer metrics in the same way that regulators and auditors do.
- Continuous monitoring uses systems to examine all of an organization's transactions and data to assess control effectiveness and identify risks on an ongoing basis. If finance detects control design or implementation issues earlier, they can correct them earlier, thereby reducing cost of errors, omissions and other deficiencies. It is important to design a process for using data to address control issues and follow up on results.
In these ways, analytics can improve the quality of financial reporting and provide opportunities for financial professionals to gain valuable insights to aid in decision making.