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The Financial Close Process: Implications for Future Research

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... 2012 Finance organizations need to proactively ... Review Preliminary Results Perform Final ... Firms have moved from outsourcing XBRL to ... – PowerPoint PPT presentation

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Title: The Financial Close Process: Implications for Future Research


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
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, SECs 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 managements 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 managements 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??
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