Executive decisions push the business in new directions, shift management’s focus to what is mission critical and account for the company’s current position. In order to make the right choices, leaders need a clear understanding of the enterprise’s performance – or, more specifically, an accurate view of its financial data.
Corporations implement Enterprise Resource Planning (ERP) systems to reflect their company’s structure at the time of the project. But in time, disparate financial systems begin to come about, and the ERP represents the organization’s true function less and less. This leads to issues with financial reporting that hinder the executive team’s decision-making. Such incongruity can be caused by a number of normal factors: acquisitions or divestitures, expansion into new global markets, or changing regulatory requirements, just to name a few.
In order to address the need for clear and correct financial information, different methods of financial consolidation are instituted to establish a top-down view of the company. Certain ERP systems even have built-in or add-on modules, such as Oracle’s® E-Business Suite Financial Consolidation Hub, which bring together disparate financial information from different parts of the organization to create a consolidated view of the financials for the enterprise. However, most companies are still unable to consolidate their financials using only one method; and even then, the results are not always consistent. It is not unusual for a CEO to receive multiple reports, each with different revenue numbers for the parent organization. Typically, companies will use several consolidation techniques to account for all of the bolted-on modules and siloed information. The most common methods are explained below:
Manual consolidation using spreadsheets
Most companies start with a few spreadsheets to consolidate financials from different parts of an organization which use different systems, or to perform the first close after an acquisition when there is a very narrow timeline. Although spreadsheets are the most common tool used for reporting, they are also the least reliable and should not be considered a viable long-term solution.
- One worksheet quickly leads to hundreds, if not thousands, of spreadsheets.
- The large number of links between multiple spreadsheets means that a single inaccuracy can have far-reaching consequences.
- Spreadsheets do not have built-in controls, definitions or standards. It is too easy to copy a spreadsheet, or the values within a spreadsheet, and make changes to a formula. There is also the added possibility of interpreting the source data differently from spreadsheet to spreadsheet, thereby obtaining different results.
- It is extremely difficult to track certain changes, which is necessary to comply with Sarbanes Oxley. Similarly, it is difficult to drill back from the spreadsheets to the source data.
- The initial cost is low (requiring little immediate capital investment), which makes the use of spreadsheets as a quick fix so attractive. But in the long-term, the project scope is deceiving, as too little importance is placed on human resources and data quality.
Consolidation within the ERP system
In Oracle, a new set of books or ledger is defined. Then, detail or summary general ledger (GL) data from each of the other sets of books is merged into the consolidated set of books. Performing changes to the ERP like this requires creating mapping rules from each existing set of books or ledger to the new consolidated set of books.
- A consolidated set of books is the most accurate when the chart of accounts (CoA) is shared across all sets of books, and the rollup structures are well-defined at the right level of detail so that data can be tracked consistently.
- The ERP system becomes the data repository for summary level business information and consolidated financials.
- If data is spread across multiple instances or if there are multiple sources for the data, a consolidated set of books will not work as well, because consistency is not enforced.
- Other limitations of a consolidated set of books are that financials are tracked only at the GL level, and it is very difficult to drill-down to the different subledgers and to reconcile the consolidated financials across all E-Business Suite modules.
Use of third-party tools for consolidation and reporting
Depending on the tools used, this method often requires making substantial investments in software that is designed specifically for consolidation reporting purposes. The tools run on top of the database applications, retrieve data from disparate sources, and manipulate the data in their own environment for increased visibility.
- The accuracy of third party tools depends on the degree of consistency of the source data and standards for the level of detail from each source.
- Third party tools such as Hyperion or Clarify rely on the quality of the data, the mapping from the source to the consolidated financials, and on a rigor enforced by a common chart of accounts and standard business processes to provide management with a complete, consistent and correct view of the consolidated financial operations.
Despite each of the consolidation methods mentioned, the accuracy of the financial reports realistically depends on several factors, the most important of which is the consistency and completeness of the source data. If there is a single source for the detailed financials, (rather than several different legacy systems, or several systems integrated together) then it is much easier to combine the results.
However, with the introduction of the ledger sets functionality in EBS Release 12 (R12), the organization is able to enforce a new degree of consistency, by allowing new ledger entries to be created based on user-defined business rules. When a user enters the information once and then generates entries in other ledgers, there is a reduced likelihood for error. Having a single transaction ledger facilitates drill-down into different Oracle modules like Project Accounting, Payables and Receivables. The detail of each of the transactions can be kept at the subledger level with the primary ledger accumulating details from different parts of the organization. If the subledgers and the chart of accounts (CoA) represent the organization’s daily business accurately and at the same level of detail; then, it is easy to roll-up to consolidated financials, and to drill-down to individual transactions from the GL. There are a number of steps to follow in order to achieve a successful consolidation and to be sure that one are able to get a clear top-down view of the organization.
1 Determine the requirements. What level of financial detail does an organization need for consolidation purposes? What needs to be compared? What is the frequency required for consolidation and reporting? Do different parts of the organization require different levels of financial consolidation? How much history is required to get an accurate consolidated financial picture? Are there legal requirements that dictate the type of reporting required?
2 Determine the sources of the data. Where is the data needed to meet the requirements from the previous step? Identify where the source gets that data – what is the original source of data? Starting from each original source, follow the transactions all the way to the GL and any consolidation process. Make sure that each data item maintains its integrity throughout the entire process, and that any changes to the data are well-documented.
3 Make the data sources consistent. Standardize on the level of detail required from each of the
subledgers, use common naming standards and common processes.
4 Design the chart of accounts accordingly. The chart(s) of accounts used by an organization must be able to accommodate the financial data at the level of detail that is needed. Use logical ranges in order to streamline reporting, and account for any potential future additions.
5 Create the necessary roll-up groups. Decide how to create the logical buckets for each type of financial data for reporting and reconciliation.
6 Revisit reporting structures. Make reports generic enough to allow for adding new accounts, report at a different level of detail, or create a different type of consolidated financial report. Using FSG, creating master row sets allows one to generate different reports without having to rewrite each report.
Out of all of the aforementioned consolidation methods, taking advantage of the latest ledger sets feature of R12 is the most promising. If an enterprise is struggling to grow or even stagnating within its industry, then it may be symptomatic of too many disparate financial systems. Only through consistency and completeness within the ERP can an enterprise expect accuracy and agility for the executive team.