Technology for financial consolidation

The financial consolidation  process in a corporation usually begins with capturing business transactions and events and closing sub ledgers into general ledgers. It often involves reconciliations of financial statements from different subsidiaries as well as dealing with minority interest and intercompany transactions . As companies grow, so does the number of entities needing to be consolidated. The consolidation process can be complicated for corporations with multiple subsidiaries and associates, especially when their consolidation system is manual, or not integrated.

Financial consolidation in multinational companies is usually even more complex since the subsidiaries may have different fiscal calendars, charts of accounts, and currencies. Financial consolidation in these companies often includes making adjustments for intercompany transactions and expense allocation.

Let’s consider the pros and cons associated with the different options for consolidating financial statements.

Spreadsheets

Spreadsheets don’t only waste resources by needing to be checked, updated, and synchronised, due to a high rate of errors and duplications, but they also represent a lack of information security and visibility into transactions.

Changes and adjustments for complex business transactions, such as intercompany transactions, cannot be successfully tracked using spreadsheets. In addition, while using spreadsheets, it’s easy to lose control over a large amount of data. Financial consolidation is a step-by-step process from closing and consolidating to reporting; any delay or error will impact the timeliness and accuracy of consequent steps. A company that continues using spreadsheets for its financial consolidation is likely to be able to neither gain full insight into its finances nor provide accurate statutory and management reporting.

Using ERP

Many companies instead invest in ERP systems for their financial consolidation needs. Nonetheless, even a fully developed ERP system is not an ideal solution for financial consolidation, as it is difficult or impossible for data from other sources to be integrated with the system. Trouble can occur when a company enters into a merger/acquisition with another company that has an incompatible system. Also, collecting data for financial consolidation might be a challenging task, especially when a company uses different ERP and accounting systems across the organisation, which can result in inconsistent data due to different chart of accounts (i.e., different line items for capturing transactions). Moreover, ERP does not support activities that typically require manual adjustments, nor important yet complex activities related to financial consolidation, such as intercompany transactions and consolidation after merges and acquisitions.

The rising need for better financial consolidation

Along with the significant impact of the adoption of IFRS and XBRL in financial statement consolidation, public filing is required to be more detailed yet it has a shorter timeframe. Increasingly accelerated regulatory requirements and compliance costs offer a strong incentive for corporations to improve the efficiency of their accounting and financial practices.

Furthermore, a fast close and high-quality reports are seen as a competitive advantage rather than merely necessary for compliance. A well-managed financial consolidation process is important to satisfy not only regulators but also other critical stakeholders, such as investors and managers. Therefore, many corporations have sought ways to improve their entire financial close processes by adopting complete financial consolidation applications. Complete financial consolidation applications are the most common choice among best-practice companies, as they minimise the manual intervention needed for reconciliations.

Understanding the system is important

Establishing a standard process and format that allows local business units to meet local statutory reporting requirements while ensuring group consolidated financial statements are goals for many companies. Investing in technology for financial consolidation is necessary, but doing this is not very helpful without understanding the current system and the organisation’s needs.

Without this insight, investment in inappropriate technology is commonly the consequence. Some companies buy the best system and then spend time adjusting their processes to fit the system. It should be the other way around: you should not have to work for your system, your system should work for you.

However, one should not expect technology to fix inherent problems in  a company’s processes and methods. Likewise, a company will not get the most out of a new financial consolidation system if those who are to use it do not get adequate training.

Download the whitepaper “Financial consolidation: Building a bridge to operational excellence” to find out how to improve your financial consolidation process with technology.

This is the last blog in our series about financial consolidation. Check the previous articles for more information:

• Getting started with financial consolidation
• Financial consolidation: Dealing with minority interest
• Financial consolidation: Dealing with intercompany transactions