DFN: Compliance driving plans? Not sure compliance is focused on what your business needs / should be doing, consequently, I’m uncertain whether extending compliance into the future is the right way to forecast. I guess I think compliance is a ‘necessary evil’ and can in certain instances protect corporations from themselves. But, to drive a corporation based on compliance requirements, I’m not sure I’m there or will ever be there. One data set driving various reporting requirements, I’m there.
Planning for Compliance – Ensuring the Integrity of Your Plans and Forecasts by Extending the Compliance Process
October 24, 2009 in Angel Capital by olgabassoli
In the last few years, statutory reporting and planning have been fiercely competing for the attention of the Finance department. So far, statutory reporting seems to be winning.
The legal and reputation implications of not complying with the ever-growing regulation requirements have left management with no other choice than to assign top priority status to their external accounts.
Providing the required level of control to the reporting of past events has turned to be an exceptionally taxing task, absorbing an incredible amount of time and money. Even taking into consideration the savings that many organisations have realised from a more effective and automated transactional processing, the pressure on Finance and IT resources has been crippling.
Key management reporting activities, such as profitability analysis, planning and decision support have been de-prioritised until external compliance is dealt with; as a result, many organisations are left to cope with a manually intensive, disconnected and often irrelevant budgeting and forecasting process.
Conflicting Objectives and Separate Accountability
Then again, competing for resources is not the only problem. Diverging priorities have also exacerbated the disconnection of the two reporting processes. On the statutory side, the priority has been to provide evidence of fair play and of a tight grip on the internal financial processes. On the planning side, reporting has tried to step up to a more forward looking analysis, trying to unravel any sign hidden behind the data and to provide the business with a flexible tool to model the future behaviour of its profit drivers. The different goals seem to have pulled the Finance team in two competing directions, so far that many organisations have set up separate teams, typically one responsible for actual data and the other for planning and performance data.
While this organisational model seems to tackle the problem of providing sufficient focus, it doesn’t resolve the fact that the user of the two streams of information is the same. With accuracy driving the actual reporting and flexibility driving planning, organisations are struggling to keep it simple and consistent for the confused end-user. Reports are duplicated, analyses overlap and, not surprisingly, generate differing answers. Typically, the Finance actual and planning teams are working in parallel isolation, competing for resources, while heavily depending on each other.
Streamlining reports, eliminating duplications, finding the for-ever-eluding “one version of the truth” has therefore become the mission impossible of the Finance function.
The task is certainly not straightforward. With the increased pressure of reducing the costs of compliance and implicitly that of IT, how can organizations cope with the need of reducing shareholder and market surprises? How can they keep creating documentation on what happened, when and why, while at the same time being able to generate timely and relevant information for everyday business decisions?
Is EPM the answer?
Enterprise Performance Management (EPM) has appeared to be the answer. An integrated business and system framework that pulls all analytical and reporting needs in one single process and one single technical platform in order to reduce its cost and to increase its quality. So far, so good.
However, EPM solutions are often forced to work in a tangled, dysfunctional environment where they simply automate the existing practices; the opportunities offered by a fully integrated EPM solution are, therefore, not seized. Many of the existing performance management practices simply aim at reconciling the statutory P&L to the cross-functional nature of decision-making and of organisational accountability.
Once again, technology seems to be ahead of our business practices, offering an advanced, integrated tool to support old fashioned, dysfunctional reporting processes.
The situation is remindful of the large ERP investments in the 90ies, when the new systems were expected to deliver high returns simply by installing and configuring them to the current requirements. A few costly implementations after, we have learnt the benefits of house keeping before refurbishment.
So are compliance and planning the two faces of the same coin? Should they be aligned from the start to reduce reconciliation afterwards? Or is segregation of duties between external compliance and planning an healthy practice which ensures independence of purpose? Are separate internal and external reporting processes an effective way of preventing the temptation to manipulate one in favour of the other?
It is indisputable that the link between past and future in the current financial reporting world is one of reciprocal connivance rather than open honesty. Let’s take, for example, the process of reporting on monthly management results while forecasting year end.
Once the actuals are reported, the year-end forecast often becomes a time-reallocation exercise over the remaining months. Forecasting of debtors, creditors and provisions becomes a tool to make the numbers add up to the intended year end forecast rather than a way to increase visibility in the future financial results. Short terms measures, such as period end sales maximisation, last minute budget cuts and provision releases, are often adopted with the intent of adjusting reality to forecast.
While actual reporting and forecasting often provide an example of unhealthy dependency, target setting can provide an example of conflict of interest during the planning process. Managers are asked to find innovative ways of enhancing company profitability and to stretch the targets; and they’re asked to link their financial reward and career progression to these stretched targets. Caution and self-preservation can strongly drive the business manager behaviour. Consequently, the negotiation process with the headquarters can become tiring, lengthy and, worse of all, tainted. The road to an open and transparent way of devising growth strategy and predicting results is jammed.
The lack of a visible and integer way of predicting future business behaviour has not come unnoticed to analysts and investors. Organisations have found themselves paying a high price for getting their forecast badly wrong or for failing to provide satisfactory and convincing evidence of the soundness of their projections to the external stakeholders. It has been suggested that missing a revenue forecast or making a re-statement typically costs 10%-20% of market capitalisation (Source: Parson Consulting Group 2004).
The EPM framework has offered a ready tool to bridge the gap between the two sides of analysis and reporting. However, until recently, the difference in purpose and accountability has prompted organisations to look at the two processes of backward and forward reporting separately. Therefore, when it comes to the financial consolidation and planning processes, organizations have considered their business and technology requirements separately.
For financial consolidation and reporting, in order to streamline reporting cycles and reduce the global costs of compliance, organizations are looking to fulfil requirements such as:
consolidation flexibility, such as support for multiple reporting standards, US GAAP, UK GAAP, IFRS, IAS and so on
multiple currency translation
standard statutory reporting production (legal, statutory and tax)
From a planning perspective, in order to satisfy both the business (bottom-up planning) and the corporate centre (top-down planning), organizations are looking for:
multi-level operational planning to simultaneously enable, for example, corporate budget planning, workforce planning, capital expense planning, revenue planning, marketing campaign planning
modelling and simulation flexibility, including cost allocation, time series intelligence, spreads and adjustments
collaborative, event-based planning triggering ongoing re-forecasting
driver-based planning and forecasting
matrix workflow for testing and validating plans across business units
online and off line analytical capabilities
multiple data entry facilities such as flat file, ETL, excel, web-based and off-line entry forms
seamless integration with other analytical and reporting applications, such as balances scorecard, portfolio management, business modelling, Microsoft Office
flexible reporting production.
EPM Needs an Integrated Business Design
It is undeniable that an EPM framework can help converging these requirements while preserving the integrity of the whole process. However, this is only possible once the initial step of listing and prioritising different needs is completed.
Regardless of the pressure for a short implementation time, organisations should address all the key organisational reporting needs. Only an integrated design can resolve the misalignment of intents at source.
Addressing all reporting needs at once allows the business to optimally work with the IT department to tie all the requirements together while still satisfying all the individual needs of the assorted business users community. IT can then become the place in the organisation where data integrity materialises. From an economical side, the unifying process can bring benefits such as lower cost of ownership, lower cost of deployment and integration, improved user productivity, greater deployment flexibility and flexible licensing. That is why many organizations are now looking at financial consolidation and planning solutions in conjunction with each other and as part of a larger business performance management process and solution.
IT can help the organisation combine the diverse requirements in one common data structure which will significantly reduce duplications, reconciliations, mapping and board discussions around the more correct set of figures. The standardisation tools that the IT department can use to drive conflicting users requirements together are:
Integration and synchronization mechanism with metadata sources
Unique definition of performance indicators used by different functions and processes
Common language for performance measures
Common Data Integration
Synchronization with operational sources
Synchronization across EPM processes
Common System Integration
Application administration and management
Security and user provisioning
Calculation features, e.g. aggregation and inter-company eliminations
Reporting and analysis tools
Microsoft Excel interface
Standardising your EPM platform can be a project in itself and does take the time and resources but the return on investment can be proportionally great. As part of the standardization process, Finance and IT will have to build a common system and process platform able to combine the different times, different frequencies and different drivers of both actuals and planning.
So what are the signs that it time to address the misalignment in your statutory and planning reporting? When is a company not making the most out of its EPM investment? When the misalignment between consolidation and planning is more costing the organisation more than the process of fixing it?
Here are some simple qualification criteria for when an organisation needs to urgently address the integration management and statutory.
Is your management structure different from your legal structure?
Laws in certain countries prohibit combining banking and insurance activities within one legal entity because of contagion risk. However, banks and insurers, as well as securities institutions, are allowed to be part of one company, for instance for commercial reasons, provided that certain risk management procedures are in place.
Whatever the reason, the connection between your legal and management structure should be clear and data should roll up seamless from a common source base to the various hierarchies without any need of manual reconciliation or re-keying of data.
Do you need to be able to budget at a different level than your statutory reporting?
The management and budgeting processes are usually driven by a higher level of accountability than external reporting, thus generating the need for a lower level of granularity. From a data structure point of view, this means that more data dimensions are required. Where a financial consolidation system seldom exceeds 12 dimensions (e.g. legal entity, product, geography), a planning solution can need as much as 20 dimensions; in addition to the consolidation dimensions, it will need, for example, data by employee, project, business unit, function, customer, scenario, version and so on. Many organisations fulfil this requirement through intensive mapping exercises, complex allocations and spreadsheet based calculation and analysis. Data are often requested again to the operational functions, leading to general business dissatisfaction, waste of time and distrust in the ability of the Finance department to control the flow of data and the generation of information.
A common data structure is the basis to provide all business with a meaningful data view and reliable data values. This can only be achieved if Finance and IT work together in mapping the requirement of the whole organisation, rather than building reports for a single user group at a time.
Does your organization need to provide more forward looking statements?
Your organization might be expanding its operations into new territories, opening new markets or has a general strategy of increasing market share within a 3-5 year time frame. In that case, statements made to shareholders or press releases will have to contain forward looking statements which needs to be supported by bottom up evidence and monitoring process.
Reliable projections can be generated through a proven business model which uses empirical evidence to recognise which variable are controllable and which are not. Organisations also need to demonstrate that decisions are taken by the internal management to influence the controllable profit drivers, that results are monitored, and that actions are adjusted accordingly and that adequate provision has been taken to protect the business against the less controllable events. A strict compliance process need to be applied to any business modelling and forward looking metrics which the company plans to use to drive investors’ profitability. A strong management reporting discipline will prove that the company is committed to compliance and transparency whether reporting internally or externally.
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