Closer to excellenceFILE/...Closer to excellence Nordic Closing Excellence Survey 2018 takes a...

Closer toexcellenceNordic Closing Excellence Survey2018 takes a closer look at thefinancial closing processes of 240Nordic companies, and looks into how your company can move closer toward an excellent finan-cial closing process.

THE N

OR

DIC CLO

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EXCELLENCE SU

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EY 2018

Welcome 4

Executive summary 6

Why process automation is a key enabler of digital transformation 10

The importance of process standardization and automation 11

Why focus on closing excellence? 12

A digital mindset — managing change during digital transformation 14

Tools to support closing excellence 15

How nonfinancial reporting is the currency of the future 16

The markets demand more reliable nonfinancial information ... 17

… but nonfinancial reporting still remain immature in most companies 18

Managing investors’ expectations 19

How fast are the fastest? 20

What does it take to become a high performer? 24

How do high performers manage their financial closing process? 29

How do high performers work with internal controls over the financial closing process? 37

How have high performers designed the IT setup that supports the financial closing process? 42

Survey methodology 46

How EY helps clients move closer to excellence 48

On average, high performers spend six days on their

monthly closing process.

4 | Closer to excellence

Closing the books is a core task of the finance function in almost all companies.The monthly management report provides key decision-makers with theinformation they need to analyze the performance for the business and makethe right decisions. The financial closing process is, therefore, vital not onlybecause the quality of the management report is crucial, but also since theprocess often requires use of significant resources.

At EY, the professional teams have helped numerous companies improve boththe speed and quality of their financial closing process. With this report, weaim to use that experience — combined with the large amount of data we havegathered by interviewing 240 large- and mid-sized Nordic companies — tocontribute to the continued improvement of the financial closing process inNorwegian companies.

Particularly, we wish to draw attention to what high performers do for achievingexcellence in their closing process.

We hope you will find the report inspiring and informative.

| Welcome

Welcome

• Spend on average six days on their monthly closing process

• Produce both internal and external financial reporting of higher quality

• Feel more assured about their processes and create higher stakeholder confidence in their financial reporting

• Have a detailed understanding of their closing process and constantly work to improve it

• Have a documented and detailed understanding of significant processes, enabling them to identify key risks and mitigating internal controls

• Implement and continuously monitor a group-wide closing calendar with supporting checklists

• Operate a well-functioning shared service center (SSC)

• Have a higher degree of automated processes

• Have a higher degree of system integration and one standard chart of accounts in place

• Implement group-wide materiality thresholds and adopt a risk-based approach to the closing process

Who are high performers?Throughout this survey report, we use the term “high performers” to signify those companies with the overall leading-class performance in their closing processes. These companies are large and complex companies, but can be from different industries. The characteristics mentioned above give an overview of the areas that set high performers’ closing processes in a class of their own. These characteristics outline the basis for building excellent closing processes, which will be elaborated on in the following chapters. The discussion comprises how high performers manage financial closing processes, internal controls and the information technology (IT) setup. For insight into the methodology behind the collection and analysis of the survey data referred to in this report, see the section Survey methodology. This includes a walkthrough of the criteria used to identify the group of high performers.

High performers

Executive summary

Closer to excellence | 7

With this report, EY professionals seek to establish a baseline for excellence in the financial closing process. We aim to do so by analyzing the characterist-ics of companies that have achieved a fast and efficient closing process, while maintaining high reporting quality.

The report initially introduces the importance of focusing on automation anddigitalization in the pursuit of achieving excellence in the financial closingprocess. It also touches upon reporting of nonfinancial data. Further, the reportwill elaborate the common characteristics of high performers within threeimportant areas:• How high-performing companies manage their financial closing process• How high-performing companies work with internal controls over the financial

closing process• How high-performing companies have designed the IT setup that supports the

closing process

Most companies today focus on closing excellence for three reasons:• To achieve a fast and cost-efficient financial closing process• To ensure high-quality financial reporting free of material errors• To free up time for more value-adding activities

In fact, this is exactly what the high performers in this survey have been able to achieve.

| Executive summary


High performers spend considerably less time on their financial closing process. On average, they spend six working days in total to complete the monthly management report, which is five working days less than the population average (time that can be spent on more value-adding activities).

High performers are more confident in their financial reporting. Some of the reasons are that they have more focus on risk and materiality, a centralized setup that ensures a group-wide standardized approach, and a higher degree of automation and system integration.

High performers not only produce higher-quality reporting faster, but they also achieve this while spending less resources on the finance function compared with the population average. High performers’ finance function costs account for approxi mate ly 1.3% of their revenue, while the population average spends 1.6%.

Main conclusions

The message is clear — by striving to be a high performer, the reward will be a closing process that is faster, of higher quality and more cost-efficient, resulting in an output that is more value-adding and better aligned with the company’s strategy.

| Executive summary

More than €5,000

Less than €500€500–€5,000

More than 1,000

Less than 250250–1,000

More than 30

Less than 1515–30

ListedNon-listed

Revenue (in millions) Number of reporting entities Ownership structure Number of full-time employees (FTEs)

9%

37%

54%

30%

17%

53% 59% 41%

20%

50%

30%

Survey facts

The 240 survey participants range from mid-sized companies to some of the largest listed groups in the Nordics. Four countries and 14 different industries were

represented. Among the participants, listed on Nordic or other stock exchanges.

14 different industries

98companies listed on Nordic or other

stock exchanges

240participants

Denmark | Sweden Finland | Norway

coun

trie

s

Why process automation is a key enabler of digital transformation


From a high-level perspective, improving the closing process can play an im-portant part in the digital transformation journey that many companies areembarking on.

Digital transformation is often associated with technologies, such as cloud-based applications, big data, artificial intelligence (AI) and mobile access.But many companies are unsure how to reap the potential benefits of theopportunities these technologies create. In this chapter, we discuss whatcompanies need to do to harness the power of digital finance.

The importance of process standardization and automationStandardization and automation of financial processes can help simplifycomplex and resource-intensive activities; improve the speed, relevance andquality of financial reporting; and free up resources for more value-addingactivities. However, it requires mapping of the process landscape to identifyimprovement opportunities. Preparation and review of workflows helpclarify responsibilities, and remove repetitive and manual tasks that are notvalue creating. Gaining an understanding of the current state, focusing onopportunities for optimization, standardization and automation provides thefoundation for digital transformation.

In order to ensure maximum value creation, it is imperative that companiesunderstand the boundaries of the process, its input and output, and the data streams. All this requires a structured, analytical approach.

| Why process automation is a key enabler of digital transformation


Why focus on closing excellence?When it comes to the financial reporting process, the key differentiatorsbetween the population average and high performers is the latter’s continuouscommitment to improve process flows and reduce errors. The error rate hasa significant impact on the cycle. EY benchmarking data¹ reveals that thoseNordic entities ranked as top performers for first-time error-free processing ofjournal entries, run their annual close five days faster, on average, than thosenot ranked as top performers. Automation of the journal entry process as wellas account reconciliation can improve the accuracy of — or reduce the need for— journal entries, leading to shorter cycle times. This is an example of how tomake the financial closing process more efficient for faster and higher qualityfinancial reporting.

Figure 1.1: Most companies want to spend less time producing financial reportsand more time analyzing them.

Analysis

Production

Control

Analysis

Production

Control


¹American Productivity and Quality Center (APQC).


In our experience, the main purpose of many companies’ financial closingprocess has been to produce financial data, i.e., getting the numbers finalized.The major part of the closing process has been spent on the mechanicsof closing the business units and consolidating the figures from a groupperspective. In many cases, financial controllers are deeply involved in theproduction of financial data and we often see group controllers whose main fo-cus is to help the business units to close their books. The value-adding busi-ness controlling, including analysis of the financial data relating to the busi-ness development, is often sacrificed as the finance function hurries to finalize the management report on time.

While the finance function is still expected to produce high-quality historicalfinancial data, the development in figure 1.1 has created an ever-increasing pressure to expand the scope and quality of the business analysis.CFOs are expected to provide the business the basis for understanding thereality underlying the financial figures, explain significant developments, andhelp CEOs and other business leaders understand the strategic implicationsof changes to the business environment. This change — as well as constantdemands for high-quality financial reporting free of material errors — requiresfocus on the closing process. This is because improving this process frees uptime and resources from production to analysis, and eliminates the sources oferrors in the process.

Since the previous Closer to excellence publication in 2015, companies haveintensified their advances into automation and digitalization. This developmentrequires companies to actively manage how their employees react to andembrace the opportunities provided by digitalization and automation.



A digital mindset — managing changeduring digital transformationDigitalization and automation change the organization’s expectations of thefinance function. The finance function needs to be capable of, and ready toassess, how digitalization and automation will affect the financial processes, and then lead the transformation of the finance function. One of the most com-mon challenges in this transformation is shifting the organizational culture. Fo-cusing on the way of thinking and changing mindsets within the organization is crucial in achieving an excellent closing process.

A digital transformation of the finance function will imply new roles andresponsibilities. For example, the finance function will achieve a reduction intime needed for different tasks, such as reconciliations while expanding skillswithin data analysis. Employees should gain an understanding of the end-to-end processes and the interrelation between cross-functional processes to achieve sustainable improvements. Further, employees should embrace the opportunity to spend their time and energy partnering with the rest of the organization, in-stead of focusing on creating and validating historical data. Hence, communicat-ing the purpose of the digital transformation, new roles and responsibilities, as well as the impact it will have for each employee, and how they can benefit from these changes, is a crucial management task.

The digital transformation of the finance function in general and financialprocesses, such as the closing process, specifically, provide huge opportunitiesfor improvement of quality and speed. Hence, it can be the leverage neededto turn the finance department into the business partner that the rest of theorganization essentially requires.

So, why do many companies still rely extensively on semi-manual processessupported by spreadsheets? EY opinion is that one of the main reasonsis the lack of structured, well-documented processes, where risks, manualtasks and non-value-adding activities are highlighted. Further, managingchange and creating a digital mindset in organizations require a well-plannedand thoroughly executed approach. EY professionals have helped numerous clients build the foundation for going digital, and they continue to offer market-leading solutions within process optimization and digitalization.



Tools to support closing excellenceWith closing tools, your company has the ability to automate transaction matching, account and intercompany reconciliation, journal entries and other controls and manual tasks. By standardizing and automating manual tasks, accountants and other resources involved in the closing process can free up time, which can be used to proactively partner with the business. Also, they can apply their analytical abilities, maximize value and consistently deliver reliable financial results.

By standardizing the processes and making them visible for the organization, these tools provide transparency of the closing process, including insight into risks and controls in the process. This gives an overview of the bottlenecks, reduces the overall closing effort and speeds up access to managerial and financial information.

Handling account reconciliation is an example of time-consuming and often manually performed activities at month-end close. Cloud-based software can be used for automated reconciliation, including transaction matching and posting of journal entries, with integrated approval flows and electronic documentation. Implementing automation tools can eliminate the paper-driven and cumbersome closing entries, and free up time for more value adding activities.

For most companies, internal control is a key factor to achieve a fast and reliable financial closing. Closing tools support known internal control over financial reporting (ICFR) methodologies, such as the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework, and include risks and controls as an operational part of the closing process.

Using special purpose tools in the closing process also gives the possibilities to benchmark the process in detail and look for areas to improve by either increased effectiveness or better control.


Traditionally, closing the books has been done manually — from using binders and markers for transaction reconciliation to using complex spreadsheets. This process often involves a lot of work to be performed in a short amount of time. The process has been referred to as “the last mile of finance,”² because until recently, there has been little or no application support for this process.

By using special purpose-built tools (often cloud-based) with a holistic approach, financial statement close becomes repeatable, predictable and well controlled, ensuring greater confidence in the accuracy of the data.

2 Taking a Holistic Approach to the LastMile of the Financial Close,” Gartner,https://www.gartner.com/doc/546914/taking-holistic-approach-mile-financial,accessed 20 November 2018.


How nonfinancial reporting is the currency of the future


Markets demand more reliable nonfinancial information ...New risks and opportunities challenge companies, especially aroundstakeholder communication, on how their business strategies can adapt andgenerate long-term value.

Nonfinancial reporting is therefore rapidly forced into the CFO agenda becauseof increased pressure from external stakeholders and investors. Nonfinancialperformance now plays a pivotal role in the investment decision of globalinvestors, with over 90% of investors stating that they rely on nonfinancialinformation on environment, social and governance (ESG) issues when decidingwhether to invest in a company.³

A key development in the last decades is that the market perception ofvalue has gone from a focus on material assets, such as factories andmachinery, to intangible assets — brand value, intellectual property, human cap-ital and talent development. Intangible assets are poorly addressed bytraditional financial reporting and this is why we see this shift toward increaseddemand for reporting of nonfinancial data.

Following the Paris Agreement, many investors are focusing on the impactsof climate change, which can have negative financial consequences throughtransition risks, such as increased carbon pricing changes in regulation, newtechnologies or changes in consumer preferences. Also the physical impacts ofclimate change ares being felt, and investors increasingly assess how changesin precipitation, temperature or more extreme weather can impacts businessmodels around the world.

On a general level, nonfinancial reporting is today lagging behind investorexpectations — over 72% of investors think that current ESG disclosuresare inadequate,4 finding information either insufficient or unreliable. Thiscorresponds to the results of our Closing Excellence survey, where the majorityof Norwegian respondents from 2018 say that the quality of their internalcontrol for nonfinancial reporting lags behind financial reporting.

Figure 1.2: Is the quality of internal controls on nonfinancial reporting the same as for financial reporting?

Also the regulatory agenda has been catching up. The EU introduced its new directive on nonfinanciall reporting last year, which will require extended reporting on ESG issues and how they affect a company’s business model. The directive is not yet implemented into Norwegian law, so the specific reporting threshold for Norway is not yet set. However for reference, the directive is implemented in Sweden where it applies to companies with over 250 employees, or over SEK350m turnover or SEK175m assets.

58% 42%

Yes No

Of the Norwegianrespondents from 2018,73% say that they report

on sustainability andnonfinancial data — data

related to corporate socialresponsibility (CSR) ...

… but only 54% saythat the quality is thesame or almost the

same as reporting offinancial data.

| How nonfinancial reporting is the currency of the future

³ ESG-investor survey, EY Reporting 20184 Is your nonfinancial performance revealing the true value of your business to investors?,” EY

website, https://www.ey.com/Publication/vwLUAssets/EY_-_Nonfinancial_performance_may_influence_investors/$FILE/ey-nonfinancial-performance-may-influence-investors.pdf, accessed20 November 2018.

| How nonfinancial reporting is the currency of the future


… but nonfinancial reporting still remains immature in most companiesThe respondents identify a range of factors, which contribute to reduced quality of companies’ nonfinancial reporting, associated mainly with insufficient prioritization and policies, inadequate systems and management, and lack of internal knowledge and integration with financial reporting.

Ways to improve reporting of nonfinancial data are to apply existing knowledge and controls in the finance department on nonfinancial reporting processes. Further, integrate nonfinancial reporting in the enterprise resource planning (ERP) system and place it under the responsibility of the finance function. It is also beneficial to adopt international reporting frameworks, such as the Global Reporting Initiative (GRI), which allows for standardized, comparable and verifiable reporting on a wide range of ESG indicators. This will help align external reporting to guidance by the Nordic stock exchanges, and help direct reporting toward what is most material for your company and its stakeholders.

Finally, external verification of nonfinancial reporting can increase reliability of reported numbers, and help structure internal processes to make reporting more accurate and streamlined. It also helps to highlight areas for further improvement through improving management systems, data quality and analysis. Thus, verification can save resources by making reporting processes more efficient, while it helps meet investors’ increasing demands for reliable information on sustainability.

Checklist for improvedreporting:• Tone-from-the top and

support from board or topmanagement

• Management systems forsustainability aspects (health,sustainability and environment(HSE); sustainable supplychain; compliance; etc.)

• Policies and formalizedstructure for nonfinancialreporting

• Reporting frameworks, such asGlobal Reporting Initiative (GRI), or Sustainability Ac-counting Standards Board (SASB)

• Integration into companies’external and financialreporting processes

• Dedicated and specializedresources and software

• External verification ofnonfinancial reporting

Figure 1.5: External verification

42%

Yes

58%

No

Figure 1.3: Tool for consolidation and reporting of nonfinancial data

ERP system

Excel

17%

69%

14%

Other

Figure 1.4: Responsible for consolidation and reporting of nonfinancial data

20%7% 10%

34%

Finance HR Communication

29%

CSR Other

Norwegian respondents in 2018

| Managing investors’ expectation


Listed companies — where active investors have an increasing influence anddemand for additional information — have to meet global leading practices.There are also high expectations with respect to responsiveness to investors’requests. With constant changes in the capital market and corporategovernance regulations, high-quality financial communication must provide agreater volume of intelligence and it must adapt to these changes.

The public market is quite demanding as investors insist on transparency and will not tolerate negative surprises. Companies should meet or beat the expecta-tions the company have set. To thrive, the company needs to demonstrate to in-vestors that management are successfully executing the business plan, meeting financial targets consistently and attracting the right investors, while ensuring regulatory compliance.

Shareholders, regulators and the capital market need to be kept informedof corporate developments in a variety of disclosures, including annual andinterim reports, ad hoc disclosures related to M&A transactions, news anddevelopments, share transactions, changes in shareholdings and shareholders’meetings. In addition comes investor meetings and days, and responding toquestions from investors, analysts and the press.

As a public company, expectations are high. You must comply with the capital market regulations and the expectations that you have set for fulfilling on your promises. To satisfy the increasing need for transparency and information required by investors and other stakeholders, high-quality external reporting is crucial.

Robust processes are critical for high-quality reporting. The survey shows that high performers have a documented and detailed understanding of significant processes, enabling them to identify key risks and mitigating controls.

Managing investors’expectations

Robust processes are critical

How fast are the fastest?

| How fast are the fastest?


When analyzing the financial closing process, we divide it into four steps in order to create some structure to the analysis (see Figure 2.1). The four steps present different challenges to companies. When closing business units, many companies struggle to ensure a standardized approach. Therefore, centralization (or the lack thereof) becomes an important issue. The challenges in connection with consolidation often relate to IT and automation, as well as low-quality reporting from local business units. Preparation of reports — both internal and external — often relies heavily on manual procedures and is dependent on key personnel.

Figure 2.1: The phases of the financial closing process

Closing of local business units Consolidation

Management report

External report

The difference is quite significant between how quickly the group of high per-formers and the rest of the population, go through the steps. In the followingpages, we discuss how high performers approach the closing process, but firstlet us take an overall look at the cycle times.

As is evident from Figure 2.2 on the next page, the average high performerdelivers a finalized monthly management report after approximately six workingdays. The process involves closing local business units in approximately three-and-a-half working days, before spending approximately one working dayconsolidating, and one-and-a-half working day preparing the managementreport. In contrast, the population average spends a total of 11 working days.A striking observation is that high performers have finalized their managementreport before the population average have closed their local business units.


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

High performers

Population average

Closing of local business units Consolidation Management report

Figure 2.2: Monthly reporting

In other words, high performers gain five working days each month, which canbe spent on forward-looking and more value-adding activities. Furthermore,high performers get the numbers early, allowing them to react much quicker tosignificant developments. In slower reporting companies, we often see the needto produce ad hoc reports to management, because they need information andkey numbers before the management report is finalized.

This has several undesirable consequences. First, the preparation of extrareports increases the amount of work and takes resources away from the fullscope management report, as well as other important tasks. Second, the level of internal controls over ad hoc reports is often lower, resulting in more er-rors and less management confidence in the reporting. Third, when the full-scope report arrives, the information is outdated and has lost its relevance.

These trends reveal themselves again. When we look at the quarterly and an-

nual closing process (Figures 2.3 and 2.4):

Closing of local business units

Consolidation

Management report

External report

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

High performers

Population average

Figure 2.3: Quarterly reporting




In our experience, the main aspect that high-performing companies approach differently is that they manage the closing process more efficiently as exemplified below, whereas average-performing companies have a much more ad hoc and unstructured approach to closing the books.

High performers: • Know what has to happen — and when — in order for the process to work • Have reduced and eliminated redundant tasks • Have established clear roles and responsibilities • Have analyzed and understood the connection between the process and the

IT setup • Have adopted a risk- and materiality-based approach, ensuring that internal

controls are focused on material risks and do not slow down the process unnecessarily

The average high performer delivers a finalized management report after approximately six working days.

Population average

Closing of local business units Consolidation Management report External report

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Figure 2.4: Annual reporting

High performers

Population average

What does it take to become a high performer?


| What does it take to become a high performer?

Reporting in six days or less is impressive, but what is it that high performers have done that enables them to produce management reporting so fast? And is fast reporting achieved at the expense of quality? We will now turn our attention to answering these important questions.

The following sections will discuss how high performers have prioritized their efforts in order to achieve an excellent financial closing process, internal controls and IT setup. We have analyzed the results and added our extensive experience from partnering with some of the largest Nordic companies on developing excellent closing processes.

High performers spend 1.3% of revenue

on their finance function… the population average

spends 1.6%.

High performers from EY APQC Global Benchmark spend only 0.7%.

This can be attributed to the fact that 71% of high performers operate one or more shared service

centers, compared with only 49% for the population average.


How do high performers manage their financial closing process?

| What does it take to become a high performer? | How do high performers manage their financial closing process?

Quality in outputIntuitively, it would make sense to think that faster reporting leads to lowerquality. All other things being equal, less time to produce the output means lesstime for performing the mechanics of compiling the data, financial controllingand analysis of the figures. In our experience, however, the correlation isactually the opposite. The fast-reporting companies that we have worked withover the years tend to have higher-quality reporting than their peers. Thesurvey data supports this, as is evident from figure 3.1.1. Recall that highperformers prepare their management report in five working days less than thepopulation average. Nonetheless, they are actually more confident in the qualityof the reporting than the rest of the survey population. So, the survey datasuggests that it is possible to significantly speed up the process and actuallyincrease quality at the same time — an observation that is completely in line withwhat we see when working with our clients.

High performers succeed in producing higher quality in less time through anumber of different measures, but let us start by looking at the contents of themanagement report.

Important aspects of reporting quality are reporting content, focus and scope.To a larger extent than the population average, high performers have designedboth a management report and an external report (quarterly and annual), whichreflect the strategy and related KPIs of the company, as is evident from Figure3.1.2 on next page.

In the following section, we look at how high performers have designed their closing process to facilitate fast reporting, while maintaining high-quality output. We have analyzed the survey data from three different angles to convey an understanding of some of the key areas that high performers have addressed:

1. Quality in output2. Centralization of the

reporting setup3. Standardization of

processes

1

2

4

3

5Best in class

Worst in class1

2

4

3

5

Figure 3.1.1: Confidence in management reporting

Population averageHigh performers


In our experience, it is a very common issue that the contents of the management report have not been aligned with the company’s strategy. This often leads to the management report missing the mark in terms of delivering the value that stakeholders require, both because it contains information that is not strategically significant to management, and because there may be important information, which is not contained in the report.

Not only does this diminish the value of the management report, it also means that resources and time are spent to produce information that does not bring sufficient value to management. In our experience, many companies can benefit substantially from redesigning their management report. Ensuring that (only) strategically important KPIs are included improves the report’s value to its readers — and removing nonessential data may drastically diminish the size and scope of the management report, freeing up time and resources. Our experience is that many companies produce management reports that contain too much information, are too unfocused and simply too large to be of real value. High performers have to a larger extent addressed this issue, resulting in higher quality and a more efficient process.

Centralization of the reporting setupThe benefits of centralizing key processes are many. Centralization provides the opportunity to develop highly specialized employees, because the transaction volume at the centralized location is much higher. Centralization also makes it easier to develop a standardized approach and to effectively roll out standard, group-wide policies because of the higher degree of control that group finance has over a centralized process. Finally, centralization often provides cost-saving opportunities because of economies of scale. In our experience, centralization actually is a prerequisite for a fast close, but note that we have also seen plenty of examples of unsuccessful centralization efforts. If companies are to reap the benefits inherent in a centralized reporting setup, the process of centralizing must be carefully planned and executed.



1

2

4

3

5Excellent

Poor1

2

4

3

5

Figure 3.1.2: The degree to which companies’ strategic KPIs are reflected in the reporting

1

2

4

3

5Excellent

Poor1

2

4

3

5

Man

agem

ent r

epor

tEx

tern

al re

port

High performers are more confident

in their financial reporting.


A common way of achieving centralization is through the establishment of a shared service center. In our experience, many companies have reaped significant benefits from a shared service center setup.

One area where high performers differentiate themselves from the population average is that they — to a much larger extent — have a shared service center. in place (see figure 3.1.3), which manages three or more processes (see figure 3.1.4). Again, the data supports our assumption that operating a efficient shared service center is a prerequisite for excellence. In our experience, efficient and effective use of an shared service center requires the existence of well-documented processes, continuous evaluation of the quality of output from the shared service center, and group-wide accounting and controlling policies.

The processes that are often managed by a shared service center are accounts payable, cash, intercompany and accounts receivable (see figure 3.1.5).

Centralization — along with standardization and automation, both of which are covered in the following pages — is one of the pillars upon which an excellent financial closing process can be built. But it is important to understand that centralizing key processes requires a structured, meticulously planned and well-executed approach if it is to succeed.

Figure 3.1.5: Ranking of processes managed by financial shared service centers

0 20 40 60 80 100

>6

3-6

<3


%0 20 40 60 80 100

>6

3-6

<3


%

Figure 3.1.4: Number of processes managed by shared service center

Cash

0 20 40 60 80 100

Intercompany

Accounts receivable

Inventories

Controlling

Revenue

Other

Salaries

Accounts payable

Project accounting%

High performers

Figure 3.1.3: Use of shared service center

71%

49%



Among high performers, 71% have a shared

service center in place.


Standardization of processesEnsuring a standardized execution is integral to achieving excellence in the closing process. In our experience, the group finance function must assume ownership of the financial closing process (and other related financial processes) in order to ensure a group-wide standard quality in the execution. Lack of standardization leads to numerous issues that stem from inconsistent application of accounting policies, different views of the level of quality required in the reporting, lack of consensus regarding materiality levels, etc.

In our view, a common, group-wide understanding of the closing process and its components is essential when companies wish to improve their financial closing process. A key area lies in developing and continuously maintaining process documentation in the form of flow charts and process descriptions (a topic covered in the chapter “How do high performers work with internal controls over the financial closing process?”). Other key areas include creating a high-level overview of the entire process (a group-wide closing calendar), constantly monitoring progress and ensuring that the process is continuously improved.

As is evident from figure 3.1.6, our survey shows that high performers generally have a higher degree of standardization of their processes. Most companies in the survey — both high performers and the population average — have a standard group-wide chart of accounts in place, with the high performers scoring a little higher. One standard chart of accounts — at least in all material entities — lays the groundwork for adopting a standardized approach and facilitates the application of uniform group accounting policies and, not least, uniform booking of intercompany transactions (minimizing the need for intercompany reconciliations).

Having a formal checklist of all key tasks in place, as well as defining and communicating materiality levels for the purpose of group reporting, are two key components of an efficient financial closing process. As can be seen from figure 3.1.6, high performers score significantly higher on these two parameters.



Most companies have checklists, but in our experience, the quality differs greatly. Knowing which tasks are to be performed by whom — and what the deadline is — is essential. But companies, which also know how long the different tasks are expected to take, when they are to be initiated and how they interact with each other, are generally in a much better position to close fast and continuously improve the process. In our experience, many companies struggle with materiality levels, and as figure 3.1.6 shows, this is one area where high performers stand out. Establishing consensus regarding materiality thresholds ensures that the resources applied to the closing process are spent on the specific issues that are material, and frees up time to focus on complex accounting problems, rather than issues of little or no significance.

High performers

Standard reporting package utilized by all reporting entities

Population average

0 20 40 60 80 100

Formal closing checklist outlining the key activities in place

Standard chart of accounts used by all reporting entities

Defined and implementedmateriality levels

%

Figure 3.1.6: Level of standardization in the financial closing process


Ensuring a standardized execution, and a well-defined and structured approach is integral to achieving excellence in the closing process.


What can you do?The key to improving your company’s financial closing process without having to spend excessive time and resourceslies in correct scoping of the approach. In our experience, successful improvement projects start with identifying thespecific areas that can yield the greatest benefits — and analyzing the costs (in terms of internal hours, IT upgrades andexternal assistance) associated with identifying and implementing the improvements. You should plan the project well, set realistic targets and focus on involving key players in the financial closing process to ensure that ownership of the solutions are embedded in the organization.

EY professionals have helped numerous clients harvest low-hanging fruits, (which refers to improvements with a large

impact at a low cost) and achieve significant and lasting results through a four-phase approach:


1 Perform a rapid assessment: Perform a rapid assessment of the current state. Focus on areas

that are time-consuming and where errors occur. Use the rapid assessment to focus your future efforts on the issues that really matter. In our experience, most companies can get an overview of their challenges in a week or less if the approach is planned and executed well.

2 Prepare project plan: On the basis of the rapid assessment, scope and plan your project, and

focus on low-hanging fruits. Identify the specific process owners and other key personnel that need to be involved to spot critical issues and develop solutions.

3 Execute the plan: Interview process owners and key personnel to understand current processes

in sufficient detail, get their input on improvement opportunities, and prioritize these improvements. On the basis of the information gathered on current processes and the planned improvements, design the future process. When identifying issues, focus on eliminating redundant tasks, moving non-value-adding tasks out of the closing process, implementing materiality thresholds and making better use of the existing IT setup.

4 Implement improvements: Prepare an implementation plan that describes what

needs to be done, who is responsible for doing it and what the deadlines are. As implementation unfolds, continuously monitor progress and adjust the approach when necessary.


How do high performers work with internal controls over the financial closing process?

| What does it take to become a high performer? | How do high performers work with internal controls over the financial closing process?

Figure 3.2.2: Frequency of companies’ review of their process descriptions and flowcharts in place

Figure 3.2.1: Companies with detailed process descriptions and flowcharts

High performers

Once per year

Population average

0 20 40 60 80 100

If significant changes

Multiple times per year

Rarely

%High performers

Population average

100%

72%

A solid internal control environment not only leads to more confidence in the numbers, but also implies less time spent to get there. Many companies strive for a highly automated internal control environment, with a predominance of preventive controls.

The overall conclusion based on the survey results is that there is room for improvement within the internal controls environment. Especially when it comes to automated controls supported by IT systems and the degree of preventive controls, all participants — including high performers — have great potential for improvement.

The survey shows that high performers more often have detailed process descriptions and flowcharts in place — a fact that applies to all high performers (figure 3.2.1). However, when it comes to keeping these process descriptions and flowcharts up-to-date, only half of high performers and less than half of population average review them once a year or more frequently (see figure 3.2.2). Failure to continuously update process descriptions means that these will often be outdated and viewed as irrelevant by the employees, who are supposed to use them.


Understanding processes is key to identifying the risks of material misstatements in the financial reporting. Thus, out-of-date process descriptions also mean that the company’s mapping of risks is out-of-date.

In addition to this, the survey shows that the majority of high performers have a risk and control matrix in place (figure 3.2.3). The risk and control matrix is a key tool allowing the company to manage leading-class internal controls. It brings clarity and overview, focuses on areas with risks and ensures a robust control environment, with just the right level of controls.

As for the design of the controls, the survey shows that most companies have a majority of detective controls (figure 3.2.4). This applies to both high performers and the population average, and is in line with the finding that companies only have limited automation and IT support for internal controls (figure 3.2.5).

In our experience, there is a strong correlation between having a high degree of automated controls and having mostly preventive controls. When controls are performed outside the systems, the tendency is that they are mostly detective.

An important part of achieving an excellent internal control environment is to use a risk- and materiality-based approach. In our experience, an excellent internal control setup starts with an excellent — and continuously updated — understanding of the financial processes, in general, and the closing process specifically. This approach will ensure that all significant risks are identified, subsequently enabling the design of controls to mitigate the risks.

Figure 3.2.3: Companies with a risk and control matrix in place

High performers

Population average

Figure 3.2.5: Controls automated and supported by IT systems

71%

52%

Figure 3.2.4: Extent to which controls are preventive (as opposed to detective)

High performers

Population average

46%

28%


1

2

4

3

5

Leading class

Worst in class


Nordic Closing Excellence Survey 2018 | 39

Surprisingly, half of the high performers do not

formally test their controls.

What can you do?Having an effective internal controls setup in place not only reduces the risk of material errors in the reporting to an ac-ceptable level, it also plays a big part in closing the books more efficiently and faster. Below, we have listed four criticalareas to focus on when working on optimizing the internal controls:


1 repare a risk and control matrix: The risk and con-trol matrix provides an overview of the internal

controls and their relation to key risks in the financialprocesses. In order to get the most out of the risk andcontrol matrix, it is critical that the matrix:• Is based on an updated and documented understanding

of your company’s current processes and related risks• Is continuously updated to reflect changes in

processes and related risks• Is prepared on the basis of well-defined, group-wide

materiality thresholds, ensuring that internal controlstarget and mitigate only material risks

2 Bring your controls to life: Listing your internal controls in the risk and control matrix

is a good starting point. However, ensuring that they are actually carried out is a necessary second step. Your internal controls should be imbedded in documentation and guidance used in day-to-day activities, such as process documentation, standard operating procedures and service level agreements with shared service centers and outsourcing partners.

4 Monitor your controls: Continuous monitoring of the processes, risks, and related controls

is a key aspect of an efficient and effective internal control setup. One option is to implement IT-supported monitoring of risks and controls (governance, risk management and compliance (GRC) systems). But many companies run efficient monitoring without such systems. A key aspect of control monitoring is to ensure that group controllers’ and internal audit’s site visits include evaluation of whether the controls documented in the risk and control matrix are performed as prescribed. Getting the balance right between self-assessment and actual testing of controls is also a key aspect in order to maintain a high-quality internal control setup at a reasonable cost.

3 Automate your controls: To the highest extent possible, ensure that controls are

supported by IT and automated. Therefore, perform an analysis to understand the correlation between your processes, controls and IT setup to take maximum advantage of automation possibilities. Pay particular attention to how you can utilize the functionality in your ERP system to support automated controls.


How have high performers designed the IT setup that supports the financial closing process?

| What does it take to become a high performer? | How have high performers designed the IT setup that supports the financial closing process?

Figure 3.3.1: Main internal challenges associated with financial reporting

IT (poor alignment betweenfinancial processes and

supporting IT infrastructure)Organizational issues

(complexity, unclear roles within finance)

Inefficient processes(manual routines)

No internal challenges with the financial

reporting

High performersPopulation average

0 20 40 60 80 100

Mismatch between reporting requirements

and reporting setupInsufficient time and resource

(tight deadlines)

Other

Lack of competences

%

High performers’ IT setup is characterized by a higher degree of system integration. This is supported by the fact that the majority of high performers have one main integrated system (figure 3.3.2). They have newer and more updated versions of their ERP systems (figure 3.3.3), which is a consequence of increased focus on IT infrastructure planning. In addition to high performers having more updated ERP systems, they are also more satisfied with how these systems support finance processes. In combination with their consolidation systems, these ERP systems simply better fulfil high performers’ needs (figures 3.3.4).

When we talk to clients about their financial closing process, IT is often a source of frustration. When asked about the main internal challenges associated with the financial closing process, more than half of all participants point to inefficient processes (figure 3.3.1). However, while half of the population average also mentions poor IT alignment as a major challenge, only around 40% of the high performers share this view. Let us look at what drives this difference.


One integrated system, but local installations

Different ERP systems across local and reporting entities

One integrated system across all reporting entities

OtherHigh performersPopulation average

0 20 40 60 80 100

%

Figure 3.3.2: ERP system structure

Figures 3.3.4: Satisfaction with IT setup

1

2

4

3

5Excellent

Poor1

2

4

3

5

Syst

em a

nd IT

inte

grat

ion

1

2

4

3

5Excellent

Poor1

2

4

3

5

Fulfi

llmen

t thr

ough

ERP

sys

tem


1

2

4

3

5Excellent

Poor1

2

4

3

5

Fulfi

llmen

t thr

ough

con

solid

atio

n sy

stem

Figure 3.3.3: Age of ERP systems

Four years old

High performersPopulation average

Five years old


Having one group-wide integrated ERP system can help the finance function accomplish a faster closing of business units and consolidation, while reducing iterations substantially. But there are other benefits to be derived. The ERP system can help support the internal control environment by enabling the use of a higher degree of preventive controls, which directly leads to higher confidence in the numbers. Regardless of organizational area, business management is carried out on the basis of the same numbers. This eliminates discussions and errors, and creates one set of numbers, one truth. As one main ERP system holds many advantages, it also makes it easier to standardize and optimize across borders, while enabling up- and down-scaling according to the company’s needs.

Among high performers, 63% have a plan for how

the IT architecture of their finance function should look

in three years.

Only 52% of the population average have such a plan.



What can you do?IT infrastructure, including the ERP setup, plays a big part in achieving an excellent closing process, but even companies that are not on the verge of investing heavily in IT systems and ERP setups can probably identify many low-hanging fruits they can pick. It is our experience that the functionalities in companies’ existing ERP system are often underutilized — and that the setup is not aligned with the financial processes it is supposed to support. Below, we have listed three issues that companies can address to ensure better IT support of the financial closing process.

1 Utilize your existing IT setup better: In our experience, the majority of companies can greatly

improve their financial closing process by making better use of functionality already available in their existing ERP system. When working on improvements in this area, ensure that you involve finance, process and IT personnel in developing solutions, so that all aspects are covered. This approach facilitates solutions that increase integration between systems, automate controls and improve utilization of IT systems in place.

2 Prepare a finance and IT road map: Ensuring that the strategies for IT and finance are

aligned is critical in order to build an efficient and effective approach, and identify future automation and integration possibilities.

3 Manage the risks associated with spreadsheets: Everyone uses Excel, because it is versatile and easy to use. However, the use of Excel should be governed by policies for how Excel models are designed and documented in order to

minimize the risks associated with them. Particular attention should be given to those Excel models that actually generate accounting figures. To the greatest extent possible, ensure that such models are reduced or eliminated, so that accounting figures are generated in source systems and ERP systems, rather than in Excel. Models used to analyze data should be designed according to structural guidelines separating input of data from calculations and output, and the models should be documented and transparent.

Survey methodology


Who participated in the survey?The 240 survey participants range from mid-sized companies to some of the largest listed groups in the Nordics. Four countries and more than 14 different industries were represented. Among the participants, 98 companies listed on Nordic or other stock exchanges. Below, you see illustrations of how the entire group of 240 survey participants can be described in terms of revenue, number of reporting entities, ownership structure and number of FTEs:

More than €5,000

Less than €500€500–€5,000

More than 1,000

Less than 250250–1,000

More than 30

Less than 1515–30

ListedNon-listed

Revenue (in million) Number of reporting entities

Ownership structure Number of FTEs

9%

37%

54%

30%

17%

53%

59% 41%

20%

50%30%

To clearly illustrate how high performers manage their financial closing processdifferently from other companies, we divided the survey participants intogroups of "high performers" and "population average".

How was the group of high performers determined?To be included in the group of high performers in this report, companies had tolive up to the following criteria:• Be among the fastest 10% of all participants, measured on working days spent

on monthly reporting (number of working days for closing ofbusiness units + consolidation + preparation of management report)

• Have revenue exceeding €500m• Have at least five reporting entities• Prepare a consolidation, as well as a management report on a monthly basis• Have documented processes

| Survey methodology

How EY helps clients move closer to excellence

Closing excellence: We work with the clients to improve all aspects of theirfinancial closing process. This includes reducing the time spent on closing localbusiness units, consolidation and preparation of internal and external reports.We help clients reduce errors, close faster and improve the quality of theirmanagement reporting.

Rapid assessment and diagnostics: Using the methodology, we provide theclients with a quantitative and qualitative assessment of the potential forimprovements in their closing process. We engage with main stakeholders tobuild a framework for significant lasting and value-adding changes.

ERP and digital services: We engage with the client to facilitate proper utiliza-tion of their current or future finance systems. We help to determine whether the automation opportunities inherent in their systems are fully utilized. We help the clients make their data transparent and clear to improve speed and quality, and assist them derive “one set of numbers.”

Internal controls improvement: We help the clients improve their internal con-trols over the financial closing process by confirming that the control framework is based on a solid understanding of the industry, the current financial pro-cesses and the associated risks. We assist the clients adhere to firmly estab-lished roles and responsibilities throughout the process to minimize redundancy and focus on risk and materiality.

Project management: When performing on closing excellence projects, the FAAS team gives the clients the benefits of a wide array of state-of-the-art tools and templates. Combined with the industry-leading methodology, this gives theclients efficient and fast results through a structured, tailor-made approach.

Change management: Closing excellence projects are first and foremostabout people. We help to see that all major stakeholders are involved in theimprovement process so that the changes are embedded in the organization.This way, great ideas become lasting, self-sustaining improvements.

At EY, we have many yearsof experience helping a widerange of Norwegian andinternational companiesimprove their financialprocesses, in general, and theclosing process specifically.The Financial AccountingAdvisory Services (FAAS) teamincludes professionals withinfinancial process improvement,nonfinancial reporting, ERPsystems enhancement and in-ternal controls improvement.FAAS is ambitious to playingthe part in improving the finan-cial closing process of Norwe-gian companies.


| How EY helps clients move closer to excellence


| How EY helps clients move closer to excellence

Nordic Closing Excellence Survey 2018 | 51

| The team

About FAAS NorwayAt EY Financial Accounting Advisory Services (FAAS), we help EY clients withall types of financial reporting related issues, including optimization of our theirfinancial closing process, as well as generally accepted accounting principles(GAAP) assistance and enhancement of the annual report. We translate a technically complicated field into practical solutions, making daily working life easierfor the clients.

About closing excellenceIn closing excellence projects, the clients appreciate that we bring professionalskills within accounting, process optimization, internal controls, IT, and projectand change management. What makes a difference to the clients is thatthe projects yield tangible, lasting results that are embedded in the clients’ or-ganizations.

FAAS Closing Excellence contacts

Per Øyvind Borge-HansenPartner, EY OsloProcess Excellence +47 982 06 [email protected]

Kjersti Haukom SyvertsenPartner, EY Oslo

+47 477 00 [email protected]

Morten JensenSenior Manager, EY OsloFAAS Tech +47 905 06 213 [email protected]

Trine Garfjell FløtnesManager, EY Oslo +47 997 73 948 [email protected]

We help companies make better decisions by engaging with them to develop leading-class financial reporting.

B18016dk

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services.The insights and quality services we deliver help build trust and confidencein the capital markets and in economies the world over. We developoutstanding leaders who team to deliver on our promises to all of ourstakeholders. In so doing, we play a critical role in building a better workingworld for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, ofthe member firms of Ernst & Young Global Limited, each of which is aseparate legal entity. Ernst & Young Global Limited, a UK company limitedby guarantee, does not provide services to clients. For more informationabout our organization, please visit ey.com.

About EY’s Financial Accounting Advisory Services

The changing accounting and reporting landscape provides challengesfor multinational companies as they seek to respond to global marketconditions and report their financial results while facing increased scrutinyfrom a range of stakeholders.

EY’s accounting, regulatory, compliance and information technologyprofessionals combine technical experience with business and industryinsights to help clients navigate complexity. Whether your focus is onmanaging highly technical accounting requirements or addressinggovernance and regulatory issues, having the right advisors on your sidecan make all the difference.

Our team uses proven and integrated methodologies to help you resolveyour challenging business problems, deliver accurate financial reports incomplex market conditions and make sustainable improvements for thelonger term. We understand that you need services that are adapted toyour specific industry issues, so we bring our broad sector experienceand deep subject matter knowledge to your projects in a proactive andobjective way.

© 2018 EYGM Limited.All Rights Reserved.EYG no. 000361-19Gbl

ED None.

This material has been prepared for general informational purposes only and is notintended to be relied upon as accounting, tax or other professional advice. Pleaserefer to your advisors for specific advice.

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