Londoners taking the Tube (subway) are bombarded with the phrase, “Mind the gap!” The idea is to warn them to watch out for the small space between the train cars and the platform and, presumably, the many things that can go awry with a careless step or dropping something of value at the wrong instant. Although it stretches the metaphor a bit, as the old year pulls into your Oracle E-Business Suite (EBS) shop, and the new year is about to leave the station, there are a host of things that also can go awry when closing the books at the end of a period – particularly when spreadsheets are an integral part of tying off the old year’s books. This is especially vital to remember when GAAP, IFRS, or other demands call for reporting on a basis other than that used in the firm’s primary set of books. This article canvasses several problems of over-reliance on a battery of spreadsheets and describes best practice solutions that are made possible by EBS Release 12, if it is properly configured.
Prior to Release 12, there were no easy solutions for reporting on a different accounting basis than that of the reporting set of books. Tax and regulatory, GAAP, and IFRS reporting required significant transformation of trial balances from the primary ledger accounting basis. Of the limited options available, the most common was exporting the period end trial balances to Excel, and then manipulating the data in a spreadsheet. Despite its routine usage, this practice is fraught with risk. And this threat aside, the real cost of using the spreadsheet method is the staff time maintaining, reviewing and revising these spreadsheets.
Year-end reconciliation of corporate financial data that relies on spreadsheets is a universal practice that is not fun, not accurate, and not necessary. One goal of many companies implementing an ERP (enterprise resource planning) system is to eliminate these spreadsheets. However, even with ERP systems in place, most corporations still rely heavily on spreadsheet reconciliation because their implementations sometimes reside in multiple systems or rely on separate charts of accounts (COAs) for different parts of their businesses. A company having different charts of accounts, for example, has no choice. To provide meaningful information for reconciliation, consolidation or budgeting, the company must have a consistent representation of the data. Thus, data that was recorded using different categorizations must be ‘translated’ or ‘harmonized’ by spreadsheets that attempt to standardize and make comparable the reports derived from the original data.
Neither the spreadsheet process nor the resources consumed by the spreadsheet effort are trivial. A workflow study done by one of the major accounting firms at a client site found that mid-sized companies used literally thousands of spreadsheets to map transactions between entities and reconcile supporting detail to their respective general ledgers. As an ecological matter, eliminating the many copies of those often lengthy printouts would have a favorable financial impact. In that particular company, more than 450 full-time employees (FTE) were being devoted to spreadsheet-based reconciliation, consolidation or budgeting, despite the presence of a fully implemented ERP system. The project manager estimated that having a more fully integrated ERP system with standardized charts of accounts would have reduced the spreadsheet headcount by 80 percent. Although the example at first seems extreme, it is not once the far-flung multi-jurisdictional nature of modern business entities and the familiar growth-by-acquisition patterns are considered. Profitable, growing companies regularly add new pieces to their business – and with them heterogeneous data and systems.
Beyond the resources consumed in maintaining a spreadsheet-supported reconciliation process, there are significant business risks: simple error and the potential for fraud, misuse, and liabilities that could follow. Focusing on spreadsheet error, data from an independent study show that “one percent of formula cells have errors” (Hesse). Out of 88 spreadsheets audited in seven studies, 94 percent of them contained errors. While a single error can have a negative impact, hundreds of errors can lead to disastrous results. Given the way in which the spreadsheets often build upon one another, one taking data from the other and further analyzing or adjusting it, there easily can be a compounding effect, making an accurate financial or business performance picture much less likely to emerge from the spreadsheet process. Some errors end up being blunders of high visibility and great magnitude. According to estimates, such inaccuracies can cost between $10,000 and $100,000 per error, per month.
The problem of error, and the resultant inaccuracy in spreadsheet compilations, is difficult to address effectively. One common method for detecting and eliminating human error in reporting and data analysis is peer reviewing in the form of having others check the work. While peer-reviews will reduce the number of errors that make it through the mix, in this context errors are likely to persist because of the sheer number of spreadsheets being produced at the desktop level with the possibility of error in virtually every cell, or formula, or input gathered for another spreadsheet. Here too, reducing the need for spreadsheets by standardizing the charts of accounts in the ERP system in a way that corresponds to business operations and reporting needs is a more certain path to eliminating error than improved oversight of the spreadsheet process.
Standardizing charts of accounts across a business greatly reduces the need for spreadsheet-centric activities. Once charts of accounts are uniform, there is no need to map from one chart to another, bypassing any reliance on spreadsheets to get the job done. Obviously, with the elimination of numerous spreadsheets, fewer material and especially human resources go into the reconciliation, consolidation, or budgeting cycles. A reduction of as few as ten FTE represents an annual savings of roughly $1 million each year. Importantly, the end product is better. Not only is accuracy improved by the elimination of spreadsheet cell formula errors, potential data entry errors are avoided because correct and complete data is available company-wide by queries against the ERP system. Instead of the collection of desktop generated spreadsheets, the same function is accomplished by reports that can be standardized across the company and are, in essence, printed straight from the general ledger or other data present in the ERP system. Moreover, the reports can be timelier because they eliminate the delay inherent in producing the spreadsheet efforts. The end result of reports against a standardized chart of accounts is to provide the same information more quickly based on up to the moment data that is in the general ledger, rather than older data that was inserted as a value in a spreadsheet.