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The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)
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The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Mar 26, 2015

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Page 1: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

The Financial Close Process: Implications for Future

Research

The Financial Close Process: Implications for Future

Research

Diane Janvrin (Iowa State University)Maureen Mascha (Purdue University-Calumet)

Page 2: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

“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

Page 3: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

OutlineOutline

Introduction Motivation Method Results Summary

Page 4: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Financial Close DefinitionFinancial Close Definition

routine process of completing the accounting cycle and preparing internal and external reports

Page 5: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Financial Close ProcessFinancial Close Process

Enter & Process Transactions

Report & Disclose Information

Aggregate & Analyze Results

RemediateControls

Evaluate & Test Controls

§302Certification

Audit Opinion

Form10-Q10-K

BoardBook

AuditOpinion??

AggregateFinancialAmounts

ReviewPreliminary

Results

PerformFinal

Adjustments

Report &Disclose

Information

ERP

Word

Excel E-mail Word

Excel E-mail

Page 6: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Why is financial close process important?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, SEC’s 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??

Page 7: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Our approachOur 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

Page 8: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Four factorsFour factors

Need to meet expectations

Collaboration between multiple participants

Estimation process

Ability to incorporate new regulations into the financial close process

Page 9: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Need to meet expectationsNeed 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

Page 10: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Collaboration between multiple participantsCollaboration 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

Page 11: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Estimation processEstimation process

Even small changes in management’s 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

Page 12: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Ability to incorporate new regulations into the financial close processAbility 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

Page 13: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Field InvestigationField 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

Page 14: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Findings: Need to meet expectationsFindings: 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

Page 15: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Findings: Collaboration between multiple participantsFindings: Collaboration between multiple participants

Very important; particularly for organizations with decentralized accounting functions

Page 16: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Findings: Estimation processFindings: 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

Maureen
Perhaps we could mention how forecasting is used by most firms- often as an internal control as well as a estimate of n/i technique.
Page 17: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Findings: Ability to incorporate new regulations into the financial close processFindings: 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

Page 18: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Future Research Opportunities: Need to meet expectationsFuture 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 management’s actions and effectiveness and efficiency of financial close process

Maureen
What affects firms' decisions to move software "in-house" versus keeping it out-sourced or cloud based? XBRL software is often "add-on," out-sourced, not necessarily integrated within reporting software.
Page 19: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Future Research Opportunities: Collaboration between multiple participantsFuture 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

Page 20: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Future Research Opportunities: Estimation processFuture 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?

Page 21: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Future Research Opportunities: Ability to incorporate new regulations into the financial close processFuture 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?

Page 22: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

SummarySummary

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

Page 23: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

SummarySummary

Future research is needed regarding the following factors impacting the financial close process meeting or beating management expectationscollaboration – hidden profile tasknew standardsestimates

Page 24: The Financial Close Process: Implications for Future Research Diane Janvrin (Iowa State University) Maureen Mascha (Purdue University-Calumet)

Questions??Questions??