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Accenture

Recent reporting scandals shook shareholders’ confidence and initiated calls for higher reporting standards. In hot demand is greater value-oriented and risk-related information along with increased transparency for capital markets. Efficient E-Reporting, the integration of management reporting and legal consolidation, is set to deliver the new reporting requirements. 

Introduction

The globalization of capital markets has dramatically changed the requirements faced by conventional accounting systems. Accounting scandals, such as Enron or German technology company Comroad, have intensified the pressure on accounting systems and related reporting capabilities concerning more timeliness, better quality, and broader scope.

A new holistic solution, efficient E-Reporting, meets the new requirements for reporting systems. Efficient E-Reporting is the integration of management reporting and legal consolidation based on a Web-centric architecture and a modern ERP solution that utilizes a shared corporate data pool.

Value Oriented Corporate Reporting

New Requirements for Corporate Reporting

Comroad, Enron, Xerox, and Waste Management are just a few examples among a series of reporting scandals that have damaged investors’ confidence in corporate reporting. One consequence of these scandals is the increasing demand of the financial community (analysts, fund managers, etc.) for a timely and reliable view of a company’s status. With increased competition for investor capital, there is an urgent need for nearly all publicly traded companies to respond to this demand. By providing more value-oriented and risk-related information, company information becomes more transparent to the capital markets, and thus builds confidence.

Reinvention is not a new topic for corporate reporting. Forty years ago, corporate reporting had to cope with the increased complexity of corporations as mergers and acquisitions became more commonplace. Next, shareholder value became the focus as investors demanded new types of information. In more recent years, globalization of financial markets made international accounting standards more important. In the ‘90s the pressure for faster reporting has been intensified due to reduced product lifecycles.

Today, the new challenge is to meet the investors’ increased reporting requirements concerning the three key facets of timeliness, quality, and scope.

These new requirements, which we call new reporting standards, are much more comprehensive than the requirements by international accounting standards (e.g., IAS or US-GAAP) or legal regulations. From the perspective of the corporate world, these requirements represent new, globally valid standards that simply have to be met by corporate reporting.

Let’s look at the first facet of timeliness. The new reporting standards require that companies report more frequently and that they publish their financial statements more quickly. Doing so enables them to satisfy swiftly and continuously the need to provide information to investors. As a consequence, it is no longer acceptable for a company only to fulfill the minimal requirements. This point can be made more clearly using period-filing deadlines and disclosure as an example. Publicly traded U.S. corporations are required by the SEC to disclose their financial statements within 90 calendar days after the close of the business year (45 days for quarterly reports). Financial statements of selected corporations are actually published much earlier, typically, within an average of 13 working days.

In addition to faster speed, investors are also placing higher demands in terms of the quality of reporting concerning, for instance, the degree of detail, scope, and conciseness of the published data. These increased quality requirements can be explained using the degree of detail for segment reporting as an example. This demand goes well beyond the requirements of international accounting, as these permit the submission of a segment summary. In the wake of globalization, the requirements for detailed segment reporting have increased, so that segments above a certain size can no longer be treated in a perfunctory manner.

With regard to scope requirements of reporting, an example is the expected publication of value-oriented key figures.

The international accounting standards place no requirements on the way in which these key figures are presented. However, in order to pay heed to the new reporting standards, many companies publish value-oriented key figures, such as economic value, cash flow return on investment (CFROI), and earnings per share (EPS).

The examples cited look at the requirements that make up the new reporting standards. It is clear that they are much more demanding with regard to time and quality than the minimum requirements specified by international accounting.

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The Need for Integrated Reporting

Historically, in most companies there are two separate sets of reporting: external reporting and management reporting.

External reporting refers to the statement a company is required to publish for purposes of general inspection, in keeping either with legal requirements or binding requirements established by a stock exchange as a condition for trade.

Management reporting is subject to no legal regulations and serves the exclusive purpose of supporting management in its decision-making. Management reporting generates information relevant to decision-making for business units and business areas (independent of legal units) at any given level of detail. In contrast to external reporting, management reporting usually involves no gathering of detailed, relevant consolidation information, such as partner information. For its part, external reporting requires no segment data, such as the subdivision into business areas.

The impact that the separation of external reporting and management reporting has had on organizations is very clear. In most cases, there is different content, separate departments, procedures, processes, and applications to support both types of reporting. As a result, this separation represents a considerable barrier for corporations to meet more demanding requirements. While the reorganization of a company’s reporting system is certainly time-consuming and cost-intensive, it is necessary to integrate the two in order to meet the new global requirements and gain competitive advantage.

Many companies are focused exclusively on aligning content between management reporting and external reporting. This harmonization, however, is only one element of an integrated reporting system. To comply with the new reporting standards, in particular with respect to faster reporting time, the integration of the processes, procedures, and organization is necessary. Accordingly, only a holistic framework that is truly integrated will enable companies to meet the new global requirements.

For simplicity, figure 1 shows only two extreme cases (no integration and full integration) – intermediate levels of integration are not mentioned, although they do exist for many companies. Full integration is the ideal scenario, but it isn’t feasible for all organizations to achieve in the short term. A high level of integration, however, can be achieved relatively quickly even by companies with complex group structures and highly dynamic landscapes.

The integration can be realized by a series of interim steps that make the transition smooth. The first step focuses on the consolidation hierarchy. Reconciling the structures enables the alignment of management reporting and external reporting. The second step involves integration into a single system and database as well as the integration of organizational departments responsible for reporting. This allows for validation to be carried out much more quickly and errors to be reduced, resulting in the convergence of both reporting schedules as well as content. Step three introduces the transition to harmonization and process integration. The degree of integration is increased further in step four with the introduction of automatic validation at some levels. In the final phase, full integration is achieved with complete harmonization – single data delivery, process, and organization. By following a staged roadmap, full integration can be incrementally achieved.

Efficient E-Reporting

A Holistic Approach for Reporting

Efficient E-Reporting is the integration of traditionally separated external reporting and management reporting. It is based on the e-architecture of a globally integrated information system that uses a shared corporate data pool and is supported by an Internet/intranet backbone.

Integrating external reporting and management reporting represents a major challenge for the entire organization of a company and often entails a break with traditional structures and procedures. Changes of this magnitude can only work if they are introduced in a way that aligns with the company’s strategy and only if the company’s organizational process and technological structure is taken into consideration.

Recent advancements in information technology (e.g., Web-centric architecture) allows for completely new business process designs and models. In a holistic approach business processes depend on technology for the implementation of requirements. At the same time technology enables innovative business process models. With this approach, the positive interplay between technology and processes has to be taken into account in order to secure success.

Benefits of Efficient E-Reporting

The efficiency gains associated with the introduction of efficient E-Reporting can be divided into the following categories:

• Cost-saving potential, e.g., the transition from decentralized data processing to centralized data processing, as well as the elimination of data and applications logistics.
• Time-saving potential, enabled by integrating disparate and duplicative processes.
• Enhanced quality potential enabled by the data consistency that results from having one single system.

Integration enables efficiency gains by reducing processing times, synchronizing processes, and eliminating data redundancies. Furthermore, inconsistencies are eliminated and data integrity is secured.

The essential condition for achieving the full benefits of integration is centralized data maintenance and the use of a corporate data pool. Centralized data maintenance and processing help keep data consistent. The central definition and evaluation of data guarantee a uniform standard for all participating business units, and thus uniform data quality. A further advantage of the corporate data pool is the centralized installation and servicing of the IT infrastructure, such as hardware and software components. This enables:

• The elimination of corporate-wide applications logistics, which also eliminates peripheral installation costs.
• The reduction of IT costs, as niche IT expertise is no longer needed.
• The bundling of IT infrastructure tasks which enables purchasing advantages.

Furthermore, the central data pool allows greater flexibility when it comes to the integration of upstream systems. This aspect is most significant when it comes to dynamic corporate structures. Changes to the corporate structure resulting from acquisitions and divestitures can be applied more easily, as the decentralized integration of companies requires only interface updates to the central system.

Many organizations have successfully introduced efficient E-Reporting. The benefits of efficient E-Reporting have been clearly demonstrated and measured by the following results of one of the world’s largest mySAP.com implementation at Siemens:

• 50 percent cycle time reduction for financial reporting and consolidation.
• 25 percent cost reduction through streamlined information delivery.
• Improved access to financial information and enhanced reporting capabilities through increased Intranet availability, from 70 percent to 100 percent.
• Increased content and organizational management flexibility with changes implemented in less than two hours versus the previous six-week turnaround.
• 100 percent quality rating of financial information reported versus the prior average of three corrections made after a reporting deadline.
• Improved decision-making through higher quality, more timely, consistent, and detailed data reported by business segment.

IT Strategy and Requirements

Standard ERP Solution

One of the requirements of the integration of management reporting and external reporting is that the enabling E-Reporting technology must be able to support both types of reporting. When selecting suitable software, it must first be determined if the software is to be custom built, or whether a standard solution package can be used.

Customized software can be adapted precisely to individual needs. In most cases, however, customized software is not advisable because of its associated costs. Moreover, the implementation of customized software tends to support inefficient processes and rules out improvements linked to using best practice processes.

Today, standard ERP solutions with various modules support a large percentage of the user’s needs. Standard software can also often be extended or configured, which facilitates the adoption of functions to specific company conditions. Standard software possesses the following advantages:

• Minimal development time and costs
• Regular updates, including both technological and business innovations
• Long-term support from manufacturer
• Standardized interfaces
• Broad adaptability to individual needs

Therefore, the deployment of standard software for E-Reporting is best practice. All major ERP vendors, such as SAP, PeopleSoft, and Oracle, offer modules that support accounting and reporting.

Requirements and IT Architecture

In addition to accommodating the requirements of management reporting and external reporting in a single system, the software must fulfill further criteria for the implementation of an E-Reporting system. These include high scalability and Internet backbone functionality.

Additionally, if an organization has complex group structures, the scalability of databases and applications is an especially important selection criterion for the integration effort.

A large number of companies, accounts, movements, and segment information require a system with a high degree of adaptability. Some ERP solutions support this. For example, SAP’s EC/SEM-BCS (Strategic Enterprise Management-Business Consolidation) architecture enables an easy adaptation to changing load profiles as a consequence of increasing data volume, additional applications, and higher user numbers.²

By definition, E-Reporting requires a system architecture that is supported by an intranet/ Internet backbone. Internet technology allows the integration of peripheral company subunits via a virtual network. This is the precondition for:

• Location-independent access to company data, evaluations, and representations.
• Immediate processing and forwarding of data and information.
• A continuously consistent and uniform database.
• A standardized data transfer.

A central installation of the ERP solution is selected for E-Reporting. This means that at individual companies and subgroups no decentral installation takes place, as these sub-units work directly in the central application (here corporate data pool). Figure 2 offers an illustration of the E-Reporting IT concept.

According to this concept for software architecture, the ERP module (as a central corporate data pool) comprises the main components for input, processing, and output. |All process participants, such as associated companies, business areas, and headquarters can, for instance, enter data, initiate process steps, and view data via standard ERP functions.

With the selected technological architecture, cost-intensive peripheral installations of applications and multiple data maintenance become unnecessary. Data can be recorded at remote locations via PC directly into the common ERP modules and database. This means that all participants have access to a common database and to consistent data that is generated via uniform calculation logics and that is provided in input and output reports tailored to the individual user. Redundant information and work duplications are avoided by the direct access enjoyed by all process participants.

Further advantages of the major vendors’ ERP modules are the extensive automation of standardized consolidation operations and status indicators for progress control of data input and processing. For instance, in SAP’s consolidation solution, SEM-BCS, all process steps related to reporting are integrated in the consolidation monitor.

The consolidation-unit hierarchy is arranged vertically in the consolidation monitor while the process steps (e.g., data entry, reclassifications, and currency translation) are arranged horizontally. The process steps (tasks in SAP terminology) are to be completed by every consolidation unit. The process status for each task and for each consolidation unit is represented by a symbol in the status administration. This facilitates users’ efforts, as the process steps are illustrated, and thus become easily accessible. This visualization makes the task of monitoring the data run easier for the headquarters. Process or consolidation progress can be followed for every consolidation unit or every subgroup. For instance, the indication of all companies whose processing has not been completed successfully can help deliver early support. Thus the status administration significantly increases the transparency of the data delivery process.

The possibility of flexibly defining the tasks in the data and consolidation monitors should be used to fulfill the requirements of efficient E-Reporting. This means that all tasks that can be carried out decentralized by the consolidation units should be filed in the consolidation monitor. Doing so significantly reduces the effort for headquarters and thus helps to reduce the time for preparing the financial statement.

Summary

The new reporting standards have placed new demands on organizations’ reporting systems regarding timeliness, quality, and scope. In the near future, reforms are expected that will make the legal requirements more rigorous:

“Immediately after Enron went bust, hopes were high that America would become disenchanted with GAAP and abandon its opposition to adopting the International Accounting Standards (IAS), opening the way to a single, worldwide set of accounting standards. This may happen eventually. But in the short term, the Americans are likely to resist the IAS and instead try to improve GAAP. At the same time the IAS [...] will also be upgraded. These reforms may move in a similar direction.³”

These new requirements challenge corporations to redefine their reporting systems. Efficient E-Reporting allows corporations to successfully meet this challenge. 

Endnotes

¹ Accenture (2001): Effizientes E-Reporting – Der Weg von Konzernberichterstattung und Konzernabschluss zur Financial und Technological Excellence.

² Accenture (2002): Siemens AG: Groundbreaking, Web-Enabled Reporting Leads to Coveted NYSE Listing.

³ Economist (2002): “Think of a Number: Accountancy Used to Be Boring. If Only it Still Were,” Economist, May 16th 2002.