Happily Ever After - Achieving a Fairy Tale Month-End Close

Core Guiding Principles for the Month-End Close

What Should the Close Process Be Like?

A strong month-end close differs for each accounting team. However, the following central themes are shared among teams that close the books confidently and consistently, month after month:

Accuracy. There are rarely material errors once the books are finalized.

Predictability. The universe of month-end activities around the close is well-understood. When one activity is delayed, the implications downstream are clear.

Anticipatory. Issues and exceptions are flagged proactively so that they do not become “fire drills” and delay the close.

Flexibility. Cross-training and ruthless standardization makes it easy to back each other up and reallocate workload during the close.

Signs of a Weak Month-End Close Process

Even absent a material error event, there are still tell-tale signs of a weak close process that include:

Unpredictability. This month’s close is different from the month before, and it’s hard to tell what next month’s close will be like.

Time Lag. Most companies rely on the month end close to ensure their management reports are effective tools for decision making. The value of these reports decay as time passes. The longer it takes to close, the less valuable the information is for making good decisions.

Poor Auditability. There is not enough validation, support, and audit trail. T’s aren’t crossed, and I’s aren’t dotted every time. This creates holes in your audit, forcing you to rely on the mercy of the auditor to pass. Not a good position to be in.

Fragility. The infrastructure is still too reliant upon the heroics of the people. When everyone is not performing at maximum efficiency, the process breaks down.

Poor High-Level Insight. Weak and incomplete close processes almost always lack high-level reporting. Why? Because in order to execute reporting, you need data that can be produced consistently and accurately—both of which are usually missing in a less mature process.

Reign in the Chart of Accounts

One of the biggest factors that impacts the work during the close is the chart of accounts. For any close process improvement work, the ideal starting point is to work on an effective account structure. The more active accounts there are, the more work there is to be done.

More accounts means…

• More opportunities to record transactions to the incorrect account

• More reconciliations

• More management review needed at month-end, such as variance analysis

And that’s why we start with the chart of accounts, so that we can properly manage all the work it creates downstream. We want to arrive at a set of accounts that strikes the balance between giving management adequate insight to run the business and making sure the workload makes sense for the accounting department at period-end. This exercise is best done in a setting where accounting, finance and treasury (AFT) leadership is present and can guide the business in adjusting the chart of accounts.

Here are the most common reasons for the chart of accounts becoming outdated:

• Changes in product or service offerings

• Mergers and acquisitions

• Systems change

• Poor control over account creation

Risk Rank, Use Materiality & Other Thresholds

This exercise aims to apply boundaries to our month-end focus. This is important because, at every step of the way, we need to decide what’s more critical to the business and hence deserves more resources. What this also means is that certain areas will be deemed less important to the business and hence resources will be taken away.

No one likes to hear that. We all would prefer 100% coverage over everything. In the quest to get to everything all the time our coverage becomes very superficial. Everything has been touched. But because there is a great big rush to get through the work, there is little comfort that the work is performed correctly and thoroughly.

Here are the three most common ways to set boundaries for our accounts:

• Risk Rank

• Utilize Materiality

• Set Thresholds

Risk Ranking

There are many ways to logically risk rank the criticality of accounts. The most common methods are:

Inherent Nature of the Account. Some accounts are naturally more risky no matter what’s happening in the account. For example, new accounts, liquid accounts, volatile accounts, marked to market investment accounts, miscellaneous or suspense accounts are inherently more risky.

Balance Size. Accounts with larger balances are not always, but are sometimes, more critical. These don’t have to necessarily be the largest accounts on the balance sheet dollar-wise. They could just be relatively larger, compared to the asset class or the P&L.

Past Events. If there was ever a material event—like a big adjustment—that has happened relating to an account, then we will want to watch it closely, because now this account has priors.

High-risk accounts are those where we pay special attention. Medium-and low-risk accounts on the other hand, do not require as much review during month-end.

Materiality and Other Thresholds

We then move onto materiality and thresholds. All successful projects thrive on setting and respecting clear boundaries and limits. The close process is no different. We need to clearly understand where the acceptable thresholds are for every type of activity so we can distinguish between what deserves our attention and what doesn’t. Common types of materiality and other thresholds include:

• Account balance materiality for reconciliation

• Percent tolerance for variance analysis

• Journal Entry amount threshold that requires second level sign-off

We cannot account for every situation where we will or will not tolerate an exception or an estimate, but the important part here is that we start drawing our boundaries so that the scope of the work during the close each month is finite. We make these decisions as a team. Management, as well as your auditors, needs to be aware and buy into both the concept as well as the methodology and outcome.

Auditor support and input is critical in deriving estimates and thresholds to determine priority of actions taken during the close. Always inform your auditors and seek feedback on the chosen methodology.

Establish Goals and Milestones

There is no one-size-fits-all when it comes to goals and milestones. Even within the same industry or the same size business, there are always nuances that make one accounting group able to do things another cannot.

Available technology, staff skill set, and complexity of regulatory requirements are all determining factors in this. If you’re looking or thinking about a close process improvement initiative, chances are your ideal close process looks nothing like what is happening today, and there’ll be a lot of changes in store. Change takes times, and it may not work right away. The team may have to tweak the process and try again, so the path to improvement is not linear and can even be discouraging. The key here is to tie the outcome of the project to employee objectives and performance reviews, gain quick wins to build momentum, and then attempt the more hairy goals.

Below are some of the most commonly used goals and milestones:

• Subsystem close day

• Reconciliation completion date

• Accuracy of preliminary financials

• Variance analysis completion date

• Number of non-standard journals

• Percentage of work done before Day+0

• Number of man hours dedicated to key activities

• Amount of work kicked back that requires rework

• Number of late submissions

• Frequency and nature of unexpected incidents

Protect Your Time by Saying “No”

The best way to close faster and with more focus is by doing only what’s necessary to get the books closed, until the financials are finalized. That means:

• Non-close related activities within accounting should be kept to a minimum during the close

• Close related activities themselves should be evaluated to see how many can be completed, or partially completed, before Day +0 arrives

• During the month, the accounting team can review accounts and transactions for errors so that they are not surfaced during the close to catch the team by surprise

• Special projects halt and take a back burner during the close

• Other departments, vendors, and partners should be discouraged from consuming accounting resources during the close

Sometimes it takes saying “No” to get what you want.

Improve the Technology Infrastructure

People, process, and technology work in an interconnected way. An organization’s existing technology is the foundation of our infrastructure. The people within the organization then use a combination of manual activities and your enabling tech to weave it into processes.

Once the process is built, it will further elevate the people in it because it allows them to achieve consistent results with less effort and frees up time to focus on higher value work. And if you want to exponentially increase the capacity of your people and process, you must introduce more automation to replace manual work.

Your key processes are like steps on a ladder. You build, nurture, and refine them so that the people can move higher and higher up on the value chain.

Be Audit Ready

When it comes to audit, it’s not just about showing auditors that your numbers are correct. You must have the burden of proof to show that the close and financial reporting process is sound, sustainable, and well controlled. This is achieved by:

Being organized around the Prepared By Client (PBC) process. First impressions matter, and this is your first point of contact. Whether you’re being asked to load into the auditor’s application, or do it through spreadsheets, be as organized and prompt as possible. Track everything that is delivered and ask for positive confirmation.

Executing key controls consistently. Management’s execution and monitoring of key controls is something auditors examine as part of determining the health of your organization’s financial reporting process. It’s critical that in this area, key controls are executed with precision and documented thoroughly each time.

Demonstrating clear understanding of the process. Don’t skimp on policy and procedures documentation. Cross-train employees and ensure that each team member masters and understands the importance of each month-end activity so that the tasks are executed with intention and purpose.

Achieving Happily Ever After…

By adopting the core principles that top “closers” exhibit, your organization can achieve a Happily Ever After close that pays dividends to the accounting team.

A strong close process allows for a more balanced workforce and fewer after hours work each month. Routine and administrative work is kept to a minimum, so that the staff can focus on special projects and higher-level work.

For management, a disciplined close process enables more accurate forecasts and faster analytics, which invariably result in a more nimble organization that stays a few steps ahead of the market. Auditing becomes less of a burden while audit results improve simultaneously.

All of this is within reach. It requires leadership, patience, a willingness to try (and sometimes fail), and some good tips along the way to guide the team into a better close.

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