Advanced Accounting Automation
Advanced accounting automation refers to the implementation of various processing models that are usually deployed over computerised systems. These either reduce or eliminate human interaction in respect of different accounting processes so as to maintain both the integrity of accounting records as well as meeting any statutory compliance requirements.
The financial close process describes a company’s ability to complete its accounting cycles and to produce financial statements for internal management and external legal reporting purposes often working under intense time and resource pressure. This is attributed to the last mile of financial reporting in an accounting cycle where seeking regulatory compliance for Sarbanes-Oxley, fair value accounting standards, and the XBRL mandate have significantly increased the period end workload thus negatively impacting the efficiency of the closing process.
The financial close of a legal entity is distinguished from the financial close of a multinational corporation with its independently operated and geographically dispersed business units as the process involves continual adoption to diverse regulatory environments as well as frequent changes in group structures.
Internal controls are an important part of the financial close and one critical area relates to their application over the financial reporting process. It may vary for different companies but controls generally include the five components which were outlined in the recently updated COSO framework (COSO 2013) which are defined as Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring Activities.
The scoping for advanced accounting automation suffers from a variety of operational issues that occur from changes in both internal and external environments and it is worthy of note that not all businesses fully recognize that automation can actually maximize the return from their investment in the underlying accounting infrastructure.
Different Views of Advanced Accounting Automation
Advanced accounting automation is differentiated from traditional accounting and ERP software as it deals with the bigger picture relating to the internal workings of what must happen in the last mile of finance. The references below describe advanced accounting automation by looking at the evolution of the accounting process.
► Evolving from Manual accounting to computerised accounting
► ► Replacing paper based spreadsheets with a computerized spreadsheet(s)
► ► Switching between computerized spreadsheets and non-spreadsheet tools
► Evolving from accounting issues to automation issues
► ► Moving from historical cost accounting to fair value accounting
► ► Switching from financial accounting to integrated management accounting
► ► ► Evolving from a legal entity to a strategic business unit
Evolving from Manual Accounting to Computerised Accounting
The performance capabilities of computers and telecommunications have become an enabler to achieve a more automated environment for accounting as not only have speeds been doubling every few years ( following Moore’s Law ) but costs have reduced to more affordable levels.
Replacing Paper Based Spreadsheets with a Computerised Spreadsheet(s)
Although paper based documents for accounting have been created for hundreds of years computerized spreadsheets are much newer and started with Visicalc in 1978 and moved through various iterations, such as the popular Lotus 1-2-3 in 1983, to the mega successful Microsoft Excel. Flexibility, user friendliness and low entrance costs are the main reasons attributed to the success of computerised spreadsheets for accounting. They solve real day to day finance issues but that success also created risks from the :-
► Lack of formal user training
► Lack of guidelines surrounding spreadsheet preparation
► continual entry and modification of data and reuse of worksheets for other models
► Spreadsheet errors
► Loss of data
The preparation of sales analysis reports for a global retail network is not that simple as it can involve a massive volume of sales transactions and many different combinations of data dimensions. Most of the reports will involve aggregation of sales amounts or sales quantity analysis by a different combination of dimensions such as sales transaction date, outlet code, product code, salesman code, and currency code.
Aggregation is fundamental to any computing process but you may have had the experience that when using a spreadsheet tool in conjunction with a legacy system that it cannot in fact achieve satisfactory computing results. This is because financial operations involve a massive combination of records and dimensions (i.e. rows and columns) that are necessary to compute all possible combinations of aggregated values and of note is the fact that this process of aggregation is currently mostly addressed by so called multidimensional data analysis applications.
► Aggregation of single dimensional data fields – Aggregation of actual year-to-date sales amounts for a group of companies involves the collection of single dimensional data fields from each company and assuming that each company provides their sales data to the same standard, the final aggregation process (excluding the aggregation work of individual companies) will not trigger any significant computing issues.
► Aggregation of two-way dimensional data fields – Assuming that every company exports their sales invoice data to a spreadsheet that has standardized column names / dimensions ( which may include company, invoice number, date, item number, customer, quantity and total sale amount (USD) ), then aggregation of these two-way dimensional data fields provided by each company will involve a more complex aggregation algorithm. This is because there is a substantially increased number of possible combinations available for aggregation compared with single data dimensional data fields.
► Aggregation of three-way dimensional data – Three-way dimensional data is a set of spreadsheets such as Excel Workbooks that contain multiple sheets with every sheet containing data across rows and columns.
► Aggregation of four-way dimensional data – Four-way dimensional data looks like a file folder containing multiple Excel Workbooks.
Versioning is one of most challenging areas relating to sources containing multi directional (multi-way ) data particularly when contributors are managing their work with spreadsheets noting that managing versioning to support aggregation is different from keeping all relevant amendments for audit trail purposes.
Switching Between Computerised Spreadsheet and Non-spreadsheet Tools
In addition to traditional accounting software, there are other non-spreadsheet tools that are relevant in supporting the automation of accounting including :-
► Business intelligence (BI)
► Business process management (BPM)
► Enterprise performance management (EPM)
► Enterprise resource planning (ERP)
► Extract, transform, load (ETL)
► Record to report (R2R)
All levels of management including the Chief Financial Officer (CFO) and Chief Information Officer (CIO) may expect to achieve high levels of accounting automation once any of the above tools have been implemented overlooking perhaps why so much work was previously done through the use of spreadsheets. Some users still believe that the top one feature of any of the above tools is the export function to spreadsheets mainly as they are more nimble than off the shelf packages. Functions like free form, analysis, graphical representation, support of strategic decisions, simple tracking, and automation all give a quicker learning curve to the user.
Whenever the complexity of multinational corporations is addressed with computerized systems the presence of multiple subsidiaries operating multiple business units across multiple geographical regions, means that issues will be faced with the standardization of data despite the fact that there are seemingly multiple methodologies and tools available.
Standardization of this data is one of most pressing issues faced at the headquarters or regional headquarters of any multinational corporation. Examples of issues relating to standardization include:
► Differing transaction and reporting currencies
► Differing currencies and changing exchange rates
► Differing sovereign credit ratings
► Differing units of measurement
► Differing time zones and geographical locations
► Differing regulatory environments
► Differing date and amount formats
► Differing year end dates
► Differing accounting systems
► Differing accounting policies and practices
► Differing account codes and other dimensional codes
A group of companies cannot easily implement a set of uniform account codes nor dimensional code settings for the following reasons:
► Different business segments of a group operate distinctive business operations when compared with other companies of the same group
► Companies incorporated in some countries must use a standard set of account codes as governed by law
► Intensive activities of mergers and acquisitions give too little time to effect any changes in a timely manner
► High turnover rates of finance staff may exist for some regional finance offices
► Some finance professionals realize that information required at an individual company level is significantly different from information required at a consolidated group level.
► Some finance professions believe that a unified chart of accounts is not able to offer a total solution to automate the preparation of consolidated financial statements that would comply with both management and statutory requirements
To extend the automation of any accounting process for the above situation requires a process that will involve a design to address the rising levels and complexity of data.
Modern accounting systems are facing the challenge of aggregation of higher levels of multi-directional data or unstructured data as follows :-
► Aggregation of fifth-way directional data – fifth-way directional data is when a company has invested in IT infrastructure to connect different data storage devices with each one managing multiple file folders together with multiple database and file formats (e.g. Excel, MS SQL, Sybase, DB2, ISAM).
► Aggregation of sixth-way directional data – sixth-way directional data is when a multinational corporation brings together multiple subsidiaries operating multiple business units across multiple geographical regions.
Evolving from Accounting Issues to Automation Issues
Accounting issues are different from automation issues and originate from the imperfections associated with computerization. For example the top ten accounting issues are mainly attributed to judgmental processing to resolve issues that relate to ensuring that accounting rules are met in full. However, automation issues relate to issues of computing including double-entry recording and process control that arise from the implementation of selected accounting rules and internal control policies.
The following areas can be examples of issues encountered when implementing International Financial Reporting Standards:
► IFRS 7: Financial Instruments: Disclosures
► IFRS 8: Operating Segments
► IFRS 9: Financial Instruments
► IFRS 13: Fair Value Measurement
► IFRS 15: Revenue from Contracts with Customers
► IFRS 16: Leases
Moving from Historical Cost accounting to Fair Value Accounting
The migration of IFRS towards fair value accounting from the traditional historical cost accounting is a real challenge to achieve any advanced accounting automation but without it means that the finance department must put in very long hours.
Extending Financial Accounting to be Integrated with Management Accounting
International Financial Reporting Standard (IFRS) 8, Operating Segments has implemented a Management Approach to identify, measure and disclose the financial performance of a company or a group of companies. Key implementation issues relating to this are that the standard requires for the disclosure of financial performance for some of the material operating segments and these have to be identified and reviewed by the Chief Operating Decision Maker. More sophisticated internal control systems over the preparation of financial statements are required when segmental reporting should in fact be integrated with the way that segments are presented to the Chief Operating Decision Maker.
Allocation is the heart of any management accounting issue but in most cases remains too difficult to achieve for all meaningful dimensions. Frequent export of data from systems to spreadsheets for further processing bypasses the centralized database of the legacy system causing fragmentation of audit trails within the process.
The most common cost allocations are related to reallocation of costs from shared service centers to other service centers and business units. There are three main types of cost allocation methods namely direct method, step-down method and reciprocal method.
The results of cost allocation trigger the preparation of additional vouchers with a lot of detailed accounting entries and additional problems arise from the fact that relevant voucher posting will impact inter-company current accounts, inter-company management fees, computations of staff incentive payments, taxation and consolidation adjustments and it’s not the end as any additional adjustment will trigger a series of further adjustments.
Extending Concerns from Legal Entity to Strategic Business Unit
Strategic business units are different from legal entities and so it is that management accounting is different from financial accounting. Preparation of financial accounts is to reflect the financial position and performance of a legal entity as a whole but each legal entity can operate multiple strategic business units and some legal entities can involve business operations relating to the same strategic business unit. So, implementation of accounting systems to cover the requirements for both financial accounting and management accounting is not that simple when the measurement and recognition rules of management accounting are different from financial accounting.
The use of management accounts can be even more intensive than financial accounts as it involve day-to-day monitoring of the performance of each strategic business unit compared to the more limited frequency of provision of financial information for external users such as auditors, shareholders, and government.
To prepare management accounts for each strategic business unit will involve the extraction and transformation of financial information from each legal entity of a group and this process may yield additional cost allocations that may be required when there is a services barter amongst different strategic business unit. The whole processes to complete management accounts and management consolidation grouping for each strategic business unit for the purpose of performance management can be very complicated and time consuming.
Tagging is similar to the work of denormalisation and may involve the adding of new dimensions to existing data as your legacy system does not hold the relevant information.
The existence of duplicated records attributed to specific dimensions is usually derived from aggregation of data from multiple legal entities of a company group or multiple business units of a business unit group. Without re-construction of new dimensions to indicate that those records are subjected to elimination upon aggregation the desired results cannot be achieved in a timely manner.
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