Related Topics:
			Business Research: ERP, Finance Imperative Research: Process Improvement Vendor Research: Adaptive Planning, ALG Software, Applix, Approva, Axentis, Cartesis, Centage, Certus, Clarity Systems, Coda, Cognos, FRx Software, Hyperion, Infor, KCI Computing, Lawson, Longview Solutions, Microsoft, Oracle, OutlookSoft, PROPHIX, SAP
			Printer friendly version Email this article Send feedback to editor

Summary
The practice of entwining statutory and management accounting is an enduring legacy of paper-based accounting and the rigid IT systems of the first decades of the computer age. Back then, unable to spare enough time to separate the two, companies frequently ran their business on a combination of numbers that conformed to generally accepted accounting principles (GAAP) with some management accounting amendments. Today, not only is this approach unnecessary but it is far from being a best practice. The information that auditors, lenders, shareholders and regulators require is different from what managers and executives need to know to operate the business. Therefore, companies should process the statutory and managerial data in parallel rather than doing it sequentially. Ventana Research asserts that combining the closing and reporting processes for statutory and management accounting slows these processes needlessly and may prevent organizations from getting the right information soon enough to make optimal decisions.

View
Although accounting principles and practices evolve slowly, they do change. Luca Pacioli’s invention of double-entry bookkeeping in the 15th century enabled companies to keep better-informed eyes on their operations, particularly when they expanded past a sole proprietorship. The rise of large industrial organizations four centuries later led to the development of cost accounting and analytical techniques for utilizing this information. The explosion in the number of individual investors has led to regulatory requirements for faster and more complete financial disclosure. Over the past several decades in the United States, the GAAP consensus has demanded a wider scope of analyses and interpretations. Along the way, the process of gathering information has become more difficult, whether for external users (lenders, investors, regulatory bodies and so on) or internal management purposes. This is partly because of increasingly demanding requirements and partly because the information infrastructure in larger companies (particularly those having more than 5,000 employees) usually is complex and fragmented. Although accounting rules are more intricate and reporting requirements have grown, IT capabilities also have evolved considerably. We are now at a point where companies need to step back and examine how they can marry business processes and IT systems more harmoniously.

The relationship of statutory and management accounting is a case in point. In larger companies, having them combined used to be unavoidable. In the days of paper-based systems, there weren’t enough people or time to do much more than derive the management data from the statutory accounting. Things were scarcely better in the first several decades of the computer age because it was so hard to extract data from disparate systems and integrate it to produce accurate reports. Today, however, Ventana Research believes most companies should be able to restructure their periodic closing consolidating and reporting processes into two separate but parallel data streams – one for statutory and GAAP financial reporting and the other for management accounting purposes.

A parallel approach to consolidation would enable companies to restructure the processes to optimize the sometimes conflicting requirements of each. Both require accuracy and consistency, but statutory consolidation and reporting should strive for speed, strict conformance to accounting rules and auditability. For its part, management reporting should encompass a much broader set of information beyond accounting data (including production statistics, performance metrics and the like) and therefore often will apply cost accounting approaches that depart from GAAP. For example, allocation of overhead is vitally important to management accounting, but it is usually irrelevant to statutory reporting and can be simplified there. Moreover, how a company chooses to allocate overhead expenses to assess internal performance may conflict with its attempt to optimize its externally reported results (say, to lower its tax burden using a different allocation methodology). To be sure, companies are able to address some of these issues, but to do so they usually have to assign more people, time and other resources than would be the case if they ran these processes in parallel.

Today, most companies choose between a centralized closing process and decentralized one. Ideally, however, control over statutory consolidation and reporting would be centralized at the headquarters level (or no more than one level down), while for management reporting it could be handled in a decentralized fashion (if only to bow to the political reality that lower-level managers will always find ways to bend their numbers in their favor). Centralizing – particularly for United States public companies – has the potential to reduce the risk of financial fraud or misstatement and lower the cost of external auditing. There need not be any sinister connotations to keeping more than one set of books. Almost all companies already keep multiple sets of books when it comes to depreciation and other items where tax laws provide incentives for a different treatment. Systematizing and automating the dual processes will provide companies with better numbers faster and very likely at less cost.

Assessment
Compressing the time required to close a company’s books is once again a hot topic. Many United States public companies also are in the process of trying to lower their cost of compliance with the Sarbanes-Oxley Act. Ventana Research has been recommending companies rethink their closing process to make it more efficient and to reduce risk. As part of this effort, we continue to advise firms to consider how their existing IT assets affect how they manage their close. Reducing stand-alone spreadsheet use, increasing automation in core enterprise resource planning (ERP) systems and using the right software in the right way for consolidation are obvious ways that companies can improve their consolidating closing and reporting. Applying these techniques to processing financial and managerial accounting data in parallel will provide even more benefits.

Related Research Notes
Financial Performance Management Leadership Topics for the CFO
Here’s our annual list for 2006

To Deal or Not Deal with Spreadsheets
The best approach is not to deal with them at all

Consolidating the Chart of Accounts
Applying Master Data Management to a long-standing problem

A High-Priority Close
CFOs must put real teeth into efforts to accelerate the close

Closing in on Compliance
A faster close promotes a better controlled environment