Presentation on theme: "The Financial Close Process: Implications for Future Research"— Presentation transcript:
1 The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University)Maureen Mascha (Purdue University-Calumet)
2 “The economic volatility of the past few years has left businesses hungering for more timely and uniform financial information to help them react quickly to fast-changing conditions.” Emily Chasan, Wall Street Journal, 2012“Finance organizations need to proactively manage the challenges of data quality and prepare for the upcoming regulatory requirements to avoid creating a perfect storm for their financial close and consolidation processes.” Raj Chhabra, Deliotte Consulting Director, 2010
4 Financial Close Definition routine process of completing the accounting cycle and preparing internal and external reports
5 Financial Close Process Enter & Process TransactionsReport & Disclose InformationAggregate & Analyze ResultsRemediateControlsEvaluate & Test Controls§302CertificationAudit OpinionForm10-Q10-KBoardBookAuditOpinion??AggregateFinancialAmountsReviewPreliminaryResultsPerformFinalAdjustmentsReport &DiscloseInformationERPWordExcel
6 Why is financial close process important? Recent economic volatility and increase in number of restatements has increased pressure on companies to timely report performanceRegulations (i.e., Sarbanes-Oxley, fair value accounting standards, SEC’s XBRL mandate) have increased accountants’ period-end workloadSeveral recent SEC filings have significant control weaknesses related to financial close processTime needed to complete the financial close process = internal information environment quality??
7 Our approach Literature review to identify critical issues Use results to develop field investigation questionsConduct field investigation with financial close participants from various organizationsAnalyze resultsDevelop future research recommendations
8 Four factors Need to meet expectations Collaboration between multiple participantsEstimation processAbility to incorporate new regulations into the financial close process
9 Need to meet expectations Companies often attempt to meet or beat analyst expectations during the financial close processExpectation concerns are not limited to year-end earnings
10 Collaboration between multiple participants Financial close process may be hidden-profile taskIn hidden-profile tasks, teams using bulletin-board computer-mediated communication tool may outperform teams using chat tool or communicating face-to-faceBefore collaboration technology can be effective, participants need to accept the technologyRole ambiguity may impact participants’ willingness to collaborate
11 Estimation processEven small changes in management’s estimates can trigger material misstatementEstimates allow analysts to predict future year's earnings, although they are less predictive of future cash flowsInvestors find ex post estimate analysis informative
12 Ability to incorporate new regulations into the financial close process Many new regulations balance need for standardization with need for professional judgmentTechnology may improve financial close process timeliness/ collaboration may improve MFMIn-house processes may increase organizational knowledge while outsourcing options may be cheaper
13 Field InvestigationTo date, 12 firms ranging from small firms to Fortune 50 companies; private to publicDirector of Financial Reporting / Controller12 questions based on literature review30 to 45 minutes
14 Findings: Need to meet expectations Meeting report deadline dates is criticalMeeting target bottom line numbers varies widely among firmsCompanies that update forecast monthly tend to face more target bottom line pressureAccuracy and timeliness are often equally important
15 Findings: Collaboration between multiple participants Very important; particularly for organizations with decentralized accounting functions
16 Findings: Estimation process Importance of estimation process varies significantlyInternal controls over estimation process vary widelySome firms conduct detailed estimation reviews prior to period endChanges in estimates is often last-minute changeAdjustments not always made at month-end for errors– sometimes made at quarter-end
17 Findings: Ability to incorporate new regulations into the financial close process Varies widely among firmsOften can delay and/or add stress to financial close processFirms have moved from outsourcing XBRL to internal XBRL software (bolt-on)XBRL tagging process no long delays financial close process although several managers still question why they need to tag financial statement valuesSOX generally integrated within systems
18 Future Research Opportunities: Need to meet expectations Research has examined to some degree who analysts and lenders form their early earnings expectations (Beaver 1979; Kim and Verrecchia 1991, 1997; Barron et al. 1998)Still opportunity to examine how expectations impact management’s actions and effectiveness and efficiency of financial close process
19 Future Research Opportunities: Collaboration between multiple participants Since financial close process involves close collaboration among multiple participants performing hidden-profile task,consider how hidden-profile task research may assist in examining how to improve collaboration between financial close participantsexamine how software may assist in collaboration efforts
20 Future Research Opportunities: Estimation process Explore how time pressure impacts effectiveness and efficiency of estimation processCould ex post estimate analysis improve not only period-end estimates but potentially financial close process?How do improvements in technology and documentation techniques affect estimate accuracy?
21 Future Research Opportunities: Ability to incorporate new regulations into the financial close processLimited research discussing how companies incorporate new regulations into current close processExamine when and how existing systems need to be modified or if new systems need to be developed to meet the needs of new regulationsWhat impacts decision to move XBRL from outsource to in-house? Why bolt-on rather than integrated approach?
22 SummaryFinancial close is important and potentially under- researched topicRecent economic volatility, increase in restatements has increased pressure on companies to timely report performanceNew regulations have increased accountants’ period- end workloadSeveral recent SEC filings have significant control weaknesses related to financial close processAcademic research now uses time needed to complete financial close process as proxy for internal information environment quality
23 SummaryFuture research is needed regarding the following factors impacting the financial close processmeeting or beating management expectationscollaboration – hidden profile tasknew standardsestimates