Close Faster with Centralized Accounting

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Close Faster with Centralized Accounting

The Problems with Decentralized Accounting

No matter how much standardization is incorporated into the closing process, there will still be labor inefficiencies as well as an increased level of errors if accounting transactions are processed in a large number of company locations. This is due to the inherent difficulty of running operations in multiple locations, the increased number of work queues caused by the involvement of more people, and variations in accounting procedures amongst locations.

The Advantages of Centralized Accounting

One of the best ways to resolve the closing problems caused by accounting decentralization is to require all accounting transactions to be processed from a central location. By doing so, specific types of transactions (e.g., accounts payable, billings, general ledger) can be concentrated along functional lines with a smaller number of more highly trained people, resulting in fewer errors. Also, by regrouping responsibility for accounting tasks along functional lines rather than geographical ones, it is easier to assign responsibility for various closing tasks to a smaller number of managers, making the closing process easier to monitor.

An added advantage of a centralized accounting system is the ease with which accounting errors can be researched, which reduces the time required to resolve variances in the financial statements. The improvement results from having a single central database of accounting information, allowing financial analysts to more easily drill down through layers of data to locate problem areas. This is a great improvement over a dispersed accounting operation, where the analysts are forced to ask outlying accounting departments to research issues for them, for which they may wait days to receive an answer. Thus, access to centralized accounting data eliminates the wait time associated with putting variance analysis in the work queues of divisional accounting departments.

The drill down capability just mentioned is also of increased use to corporate internal auditors, since they can research audit issues much more easily. Also, internal auditors will have a much easier time testing control systems, since more control points are located in the corporate headquarters. This makes compliance with the mandates of the Sarbanes-Oxley Act much less expensive to implement.

Another advantage of a centralized accounting system is the ability to fully automate the elimination of inter-company transactions. Since the corporate accounting staff is responsible for recording all billing transactions, it can flag all sales to related divisions, which the accounting software can then eliminate as part of the closing process. However, since the automatic elimination feature is only available in the most advanced accounting software, the corporate controller may be forced to run a custom report enumerating all inter-company transactions based on the initial flag, and then create a manual elimination journal entry. Even this less automated approach is a great advance over the traditional method of manually combing through transactions to find and eliminate inter-company transactions.

The Need for a Single Accounting System

The advantages of centralization that have just been enumerated will not be fully realized if the corporate accounting department does not use a single consolidated accounting system. If there are multiple systems at corporate headquarters requiring manual interfaces, then the drill down capability will be severely restricted. Also, different systems have a varying “look and feel,” making it more difficult to train new employees in their use. Further, software updates to one accounting system may crash any customized interfaces constructed to more easily swap data between systems. For all these reasons, a single consolidated accounting system is the best foundation for a centralized accounting system.

Another reason to have a single, central accounting system is that more advanced accounting systems contain a workflow management module. Such a module allows the corporate controller to review the status of work tasks within the accounting department. When used as part of the closing process, this can yield measurable improvements in the speed with which the closing process is completed. However, if accounting tasks are being completed throughout a multi-division company, it is very difficult to implement a work flow system in all locations, which eliminates this best practice from consideration in a non-centralized environment.

A good way to implement a conversion of accounting systems from the division level to the corporate level is to gradually do so along functional lines. For example, all payroll activities could be centralized without unduly impacting any other local accounting functions; the same holds true for the cash management and accounts payable functions. Both billings and inventory accounting may require some residual local accounting staff, and so are generally converted last or only partially to a central accounting facility.

Other Centralization Considerations

There may be highly-charged political situations where the corporate controller is not allowed to shift work from an outlying accounting group to the corporate entity. If so, consider measuring that group’s ability to issue its financial statements by a specific due date that is necessary for the corporate staff to issue statements by a target due date. If the measurement reveals that the outlying group is unable to do so, or if its reported results contain unacceptable numbers of errors, this can be used as a tool in continuing to request approval for eventually shifting that group’s accounting role to the corporate accounting facility.

If it is not possible to centralize all corporate accounting functions, then consider the use of data warehousing in order to gain some of the benefits of transaction centralization. Under this approach, the accounting department of each division uses a custom interface to transmit selected accounting results (possibly down to a fairly detailed transaction level) into a single corporate data repository. There may be an automated error-detection routine in the interface that spots potentially incorrect information and returns it to the applicable division for correction. The corporate accounting staff then uses the data in this warehouse to construct the consolidated financial statements. Though this approach simplifies the reporting process, it does nothing to reduce the error rate of divisional transactions, nor the speed with which it is delivered to the data warehouse. Also, the cost to both construct and maintain a data warehouse is quite high. In particular, if divisional accounting staffs are allowed to alter their charts of accounts, the system interfaces must constantly be revised to map these changes into the proper accounts in the data warehouse.

Podcast

There are multiple discussions about the fast close in Episodes 16 through 25 of the Accounting Best Practices podcast.