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

3. Outline
Introduction
Motivation
Method
Results
Summary

4. Financial Close Definition
routine process of completing the accounting cycle and preparing internal and external reports

5. Financial Close Process
Enter & Process Transactions
Report & Disclose Information
Aggregate & Analyze Results
Remediate
Controls
Evaluate & Test Controls
§302
Certification
Audit Opinion
Form
10-Q
10-K
Board
Book
Audit
Opinion??
Aggregate
Financial
Amounts
Review
Preliminary
Results
Perform
Final
Adjustments
Report &
Disclose
Information
ERP
Word
Excel

6. Why is financial close process important?
Recent economic volatility and increase in number of restatements has increased pressure on companies to timely report performance
Regulations (i.e., Sarbanes-Oxley, fair value accounting standards, SEC’s XBRL mandate) have increased accountants’ period-end workload
Several recent SEC filings have significant control weaknesses related to financial close process
Time 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 questions
Conduct field investigation with financial close participants from various organizations
Analyze results
Develop future research recommendations

8. Four factors Need to meet expectations
Collaboration between multiple participants
Estimation process
Ability 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 process
Expectation concerns are not limited to year-end earnings

10. Collaboration between multiple participants
Financial close process may be hidden-profile task
In hidden-profile tasks, teams using bulletin-board computer-mediated communication tool may outperform teams using chat tool or communicating face-to-face
Before collaboration technology can be effective, participants need to accept the technology   
Role ambiguity may impact participants’ willingness to collaborate

11. Estimation process
Even small changes in management’s estimates can trigger material misstatement
Estimates allow analysts to predict future year's earnings, although they are less predictive of future cash flows
Investors 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 judgment
Technology may improve financial close process timeliness/ collaboration may improve MFM
In-house processes may increase organizational knowledge while outsourcing options may be cheaper

13. Field Investigation
To date, 12 firms ranging from small firms to Fortune 50 companies; private to public
Director of Financial Reporting / Controller
12 questions based on literature review
30 to 45 minutes

14. Findings: Need to meet expectations
Meeting report deadline dates is critical
Meeting target bottom line numbers varies widely among firms
Companies that update forecast monthly tend to face more target bottom line pressure
Accuracy 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 significantly
Internal controls over estimation process vary widely
Some firms conduct detailed estimation reviews prior to period end
Changes in estimates is often last-minute change
Adjustments 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 firms
Often can delay and/or add stress to financial close process
Firms 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 values
SOX 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 participants
examine how software may assist in collaboration efforts

20. Future Research Opportunities: Estimation process
Explore how time pressure impacts effectiveness and efficiency of estimation process
Could 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 process
Limited research discussing how companies incorporate new regulations into current close process
Examine when and how existing systems need to be modified or if new systems need to be developed to meet the needs of new regulations
What impacts decision to move XBRL from outsource to in-house? Why bolt-on rather than integrated approach?

22. Summary
Financial close is important and potentially under- researched topic
Recent economic volatility, increase in restatements has increased pressure on companies to timely report performance
New regulations have increased accountants’ period- end workload
Several recent SEC filings have significant control weaknesses related to financial close process
Academic research now uses time needed to complete financial close process as proxy for internal information environment quality

23. Summary
Future research is needed regarding the following factors impacting the financial close process
meeting or beating management expectations
collaboration – hidden profile task
new standards
estimates

24. Questions??