How Fast Can a Close Be in Today's World?

As early as 1998, businesses worldwide were working to shorten their close cycles by evaluating process, system, and people issues. Many large, U.S.-based multinational corporations achieved the ideal of the "fast close." They automated and standardized their global reporting processes and systems, which enabled them to close and consolidate their global books, do analysis, and report to the market in just a few days. This put them way ahead of their U.K. and European competitors. But now the momentum is shifting.

Research shows that, as of the 2005 reporting year, more than 50 percent of companies in the FTSE100 had reduced their reporting times over the past three years. For these organizations, the average time to report at year-end fell from 55 elapsed days in 2000 to 53 days in 2005. Top 100 European companies fell from 59 days in 2000 to 52 in 2005. Despite the pressures of the IFRS, U.K. companies continue to accelerate the declaration of their financial results to the London Stock Exchange.

U.S. companies that have efficient reporting processes and systems are still reporting faster than U.K. and European companies, but U.S. companies are seeing the financial close lengthen once again. As SEC, Sarbanes-Oxley, and IFRS rules become increasingly stringent, companies can't afford to jeopardize the quality of their numbers by closing the books too fast. Particularly worrying is the juxtaposition created by Sarbanes-Oxley Section 409, which demands the timeliness of information, with Section 302, which slows reporting down. The "fast close" is beginning to look like a distant, perhaps impossible, dream for many companies.

A network of leading business performance management (BPM) consultants, collectively know as BPM International and formerly part of PwC Consulting, has performed research into the financial close cycles of companies around the world. The group ranks the speed with which large multinational corporations close their year-end books, report those results to the marketplace, and get auditor sign-off. "We have worked with and met many companies who have put a lot of effort into shortening the close cycle, particularly in the U.S. and Europe, but SOX has, unfortunately, had a very negative impact," says David Jones, chairman of BPM International. "U.S. firms are once again taking much longer to close."

The preliminary results of BPM International's latest research on close cycles shows that among the 100 largest U.S. corporations, more than 40 percent have increased the length of their close, adding an average of seven days to the timetable for announcement of their fourth-quarter and year-end results during the last three years. Over 80 percent are taking longer to get auditors' sign-off, a process that takes them an average of 21 days longer than it did three years ago. "That is three weeks where senior executives have to focus on last year's audit rather than this year's operational performance. In fast-moving markets, that's not good news!" says Jones.

A recent BPM Magazine survey sponsored by Cartesis found that 26 percent of companies have seen their financial close cycle elongate as a result of recent regulations (see exhibit 1 below). Worse, The Wall Street Journal found that the number of New York Stock Exchange- or NASDAQ-listed corporations which missed deadlines to file their results with the SEC jumped over 120 percent from spring 2005 to spring 2006.

Contrast this with BPM International's findings among Europe's largest 150 corporations, where preliminary 2006 research results show that 90 percent have reduced their year-end reporting over the last three years and a massive 80 percent have actually reduced the audit sign-off date. "I would call that an emerging competitive advantage for Europe," Jones says.

"Many corporations quite rightly see speed of close as a key symptom of their overall finance function effectiveness and so are seeking continuous improvement in all aspects of their corporate reporting processes and systems," Jones adds. Although they certainly want results to be accurate, shareholders get extremely nervous when companies can't get their act together quickly. The ability to announce first in an industry sector even leads to potential gains in the financial markets. A fast close can also save the company thousands, if not millions, of dollars by reducing the amount of staffing needed for financial reporting.

At the same time, faster financial results can lead to better decision-making and an improved bottom line. Staff that formerly spent time managing a slow close process can focus more attention on analyzing the business when the close speeds up. As one former group controller commented when his organization undertook an improvement to the close cycle, "We are going to take the manual drudgery that we should not be using qualified accountants' time for, automate it, and give the time back to the accountants to do their jobs."