Are you falling foul of the "False Month End"?
With the ever increasing demand for reporting on corporate performance, companies are being forced to close their books at month end quicker and quicker. Boasts about closing the accounts within 3 to 4 days of the month end are common place, but in reality are these companies fooling themselves or are they falling foul of the "False Month End"?
What is a month end?
It's pretty simple, closing the books means that sales made for a particular month are booked in this month and costs attributed to these sales have been charged in the correct period. A profit & Loss and balance sheet is then produced to see whether you have made any money.
This is called accrual-based accounting and has been the basis for most companies' accounting practices for over 100 years.
However, to under pin accrual based accounting there are many sub systems that need to be reconciled at month end and these accounts are called control accounts. The key control accounts are:
These control accounts are sub-systems to the General Ledger and are modules that are sold by the leading ERP (Enterprise Resource Planning) vendors. The General Ledger is the heart of any ERP system and is in serious need of an overhaul.
In the above example, all the modules reside in one integrated database i.e. one software release covers all the modules.
Warning control accounts can get seriously out of balance and can damage the health of your company.
If all the sub-systems agree with the control accounts in the General Ledger, then the CFO can have relative assurance that the figures used by General Ledger to produce the profit and loss and balance sheet are correct.
With integrated systems, there is more chance of automatically reconciling control accounts. However, many ERP vendors do not have integrated systems, but rather these sub-systems are stitched together with interface programs that link with numerous other databases.
If there is an error in one of the control accounts, there is simply no time to reconcile the accounts due to the pressure that management bring to bear at month end. It's just simple to roll over any variances to the next accounting period and hope that the variances will disappear.
Below is a diagram that represents what some major corporations are using to run their company and carry out month end reporting.
The is a non-integrated database where all the systems are on different versions and are linked together through an interface module.
If there is an error in just one of the control accounts, the time it would take to find the difference and then post the transaction through the aforementioned system could take days!
This begs the question, how do companies possibly close their books in 3 to 4 days of month end?
Typical month end scenario:
The CFO is screaming at the management and financial accountants to close the books. The management accountants are working until midnight to try to reconcile the accounts. There is a difference on the Trial Balance, the Accounts Payable control account has a $170,000 variance, the Account Receivable is only $76,000 out and the bank reconciliation still needs to be done! The result: "The False Month End", where the accounting period is rolled over with all the errors and the hunt for the difference is on again next month.
We believe that the problem should be put firmly back into the hands of the ERP vendors. If you bought a car and the steering does not work, the car would be removed from the market. The same thing should happen in the software world, if your ERP system is incapable of providing secure reconcilable figures with good reporting, it should not be sold.
What should an ERP company provide?
1. A truly integrated system where if stock is moved from one location to another it is immediately reflected in the General ledger. This implies one single database for all the ERP modules.
2. An automatic reconciliation system. The CFO should be able to go to a control account portal and see if any of the sub-systems are out of balance with the General ledger. If there is a variance, the ERP system should have an easy to follow audit trail that will explain the variance.
3. Machine postings only to all the key control accounts. No manual journal should ever be allowed to be posted to the control accounts. If there is an error that needs correcting, a separate control adjustment account should be opened and all posting should be made to this account. Auditors and CFO's can then quickly see how many journals are being made to this account and will highlight any possible discrepancies.
4. One sided journals should never be allowed unless signed off by the CFO and fully documented to the auditors.
5. The General Ledger should have security that restricts people by company, business unit and account code.
6. All budgets should be held in the secure General Ledger and all reporting should be done directly from the GL.
7. The Information Technology department should never directly change the database unless it can't be posted by a normal journal. The CFO should then sign it off and the change made to a new account. All adjustments of this type should be reported to the auditors.
8. No outside consultancy company should ever tamper with data files.
9. Key reports should be reconciled to an online inquiry system to ensure that the final figures reflect the actual General Ledger database. There are many reasons for this, but the key one is that old reports that have been written by employees that have left the company get out of balance. No one knows how these reports have been structured and new object accounts that have been added since the employee has left don't get included in the old reports which are now incorrect.
10. Accountants should not be allowed to close the month end if there are un-posted batches in the database.
11. When the month end is completed, no one can re-post journals unless authorized by the CFO.
12. No reporting should be done from a data warehouse or an OLAP database unless there is a full audit trail back to the underlying transactions in the General Ledger.
Simple rules that every major ERP vendor breaks, why?
The ERP vendors have neglected the General Ledger in their rush to provide more add on modules to their ERP suite. The Business Intelligence vendors eagerly came to their rescue and now control the majority of all major corporations reporting and budgeting. The problem is that the data is moved to a different database and the General Ledger is now irrelevant.
There are too many companies making too much money out of this for them to raise this as an issue. Even the ERP companies are happy because rather than spending money on making their general ledger secure, have quick inquiries and good reporting, they can leave it up to other companies and spend this money on additional modules that they can earn money on.
Meeting the challenge
It's time that the ERP companies face their responsibilities and begin producing secure General Ledgers that promote good reporting, inquiry and budgeting practices. Until now this has been left to the Business Intelligence (BI) companies. BI is fine for modelling sales trends etc. but should not be used for financial management reporting, especially the final Profit and Loss which needs to be signed off by the CFO!
ERP vendors should be audited and companies that can't provide control account balancing, reporting, budgeting and inquiries should have their product withdrawn from the market. It's time for the problem to come home to roost: BI has been smoothing over the ERP vendor's issues for too long; now is the right time for the serious players in the ERP market to step up to the mark and reinvigorate confidence in our accounts.
Until the above is done the "False Month End" will be around for some time to come, unless of course Sarbanes-Oxley sends you to jail!
