For an organization's internal operations, financial reporting is critical as a basis for financial analysis and budgeting. Externally, it's essential to remain in compliance with federal reporting requirements. With these considerations in mind, it behooves CFOs to make fast and accurate reporting a priority, and many look to financial reporting software to help achieve these goals.
In this guide, learn the basics of financial reporting and find out why automating the process could be beneficial. Read about enhanced "last mile of finance" functions and the pros and cons of producing financial reports with ERP systems, Microsoft Excel and specialty products. Lastly, get tips on how to approach XBRL tagging and handle the upcoming GAAP/IFRS convergence.
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Internal and external financial reporting
Most organizations prepare some type of financial reports, either for internal or external use. Common reports include balance sheets, general ledger reports, profit and loss statements, financial statements, and 10-K and 10-Q reports.
In the wake of the 2001 Enron scandal, external financial reporting requirements for U.S. companies have become more rigorous. The SEC now mandates that companies file a variety of reports to disclose their financial condition, and missed deadlines could result in fines.
Benefits of automating the financial reporting process
Software that automates financial reporting can enable users to perform in-depth what-if analyses, speed up the process and simplify financial analytics. It can also increase regulatory compliance and reduce the amount of labor involved in generating reports. While financial reporting and analysis software of the past often required heavy IT support, experts say the latest systems are now being designed for nontechnical business users.
Automated financial reporting can be achieved either through an ERP system or with the help of specialized tools. Although niche software requires implementation time and may not integrate well with other systems, experts say specialized products often offer deeper and more customized functionality than reporting modules within an ERP.
"Last mile of finance" functions further refine financial reporting
The "last mile of finance" refers to processes that are executed after the financial close, including additional close, reconciliation and disclosure management functions. According to analysts, corporate performance management (CPM) systems have begun to incorporate an increasing number of last mile functions within their suites. These tools can shorten the "close to disclose" timeframe -- how long it takes an organization to produce financial reports for external disclosure.
In recent years, the cost of executing the last mile of finance has increased as regulatory requirements have become more complex. CFOs looking to save money should consider automating the financial reporting process, experts say.
Pros and cons of using Excel for financial reporting
As with other financial management functions, a large percentage of organizations rely on Excel for financial reporting -- up to 72%, according to a study conducted by Dynamic Research.
While it's possible to create reports using Excel and export critical data to other systems, users often say using Microsoft Excel for financial reporting is arduous and can lead to poor financial visibility. Some organizations have even reported missing statutory filing deadlines due to outdated or cumbersome technology.
Experts say implementing financial reporting software can help to streamline the reporting process and reduce errors. Many offerings feature integration with Excel, which is a selling point for businesses that don't want to abandon spreadsheets entirely.
On the other hand, some financial reporting systems are too complex for an organization's needs. One company decided to return to Excel for financial reporting after finding that generating financial statements with Oracle E-Business suite was too difficult for the average business user.
Pros and cons of using an ERP for financial reporting
Organizations that choose to perform financial reporting within an ERP or financial management system often do so to avoid the implementation and integration hurdles that could arise from adopting specialized software. Most ERP systems include ad hoc reporting, as well as month, quarter and year-end reporting capabilities.
One important decision facing CFOs is whether to stick with on-premises ERP or implement a Software as a Service (SaaS) financial management system. SaaS financial applications are making real-time financial reporting a reality, but many CFOs are still wary of security and privacy issues associated with cloud technology. Although legacy systems are often reported to be less user-friendly than SaaS financial management products, the former can be customized to cater to a company's unique accounting needs.
Before making a choice, experts suggest CFOs perform a needs analysis and take into account a system's ability to adapt to changing regulatory requirements.
Since 2011, all U.S. public companies have been required to tag financial statements using XBRL, a global standard for exchanging business information that is based on the Extensible Markup Language (XML). These statements are then filed with the SEC and made available to investors within the EDGAR repository.
Historically, organizations have been resistant to XBRL, and many CFOs gripe that the tags serve no practical purpose. However, some experts say that the technology is more useful than executives think, and point to its applications for financial benchmarking and investor and lender relations.
Currently, the majority of companies employ third-party services to tag their financial statements, but one expert has recommended internal tagging as a way to increase control over the process and gain extra time to produce the final report. Last-mile-of-finance niche software products, as well as an increasing number of CPM systems, now include XBRL tagging engines, which are intended to simplify and speed the tagging process.
Implications of GAAP/IFRS convergence
The United States currently ascribes to U.S. Generally Accepted Accounting Standards for financial reporting standards, with the intention to eventually merge GAAP with the International Financial Reporting Standards (IFRS). Experts say that the IFRS/GAAP convergence, while disruptive and costly for public companies in particular, has potential to increase globalization.
While the convergence deadline is a moving target, ERP vendors are taking steps to prepare. Since megavendors SAP, Oracle and IBM have a worldwide reach, they are already compatible with IFRS and have helped some U.S. companies switch over. Smaller ERP vendors are also hastening to become IFRS-compliant.
Instead of waiting for a firm deadline to be announced, experts recommend that CFOs begin to transition to IFRS standards bit by bit over the next few years. Tips to help prepare for IFRS reporting include researching international accounting standards and applying them to business policies, leapfrogging IFRS conversion onto a larger financial management system upgrade or replacement project, and seeking help from a consultant who has assisted in a previous IFRS implementation.