Accounting: Back to basics

Peter Williams

Running a finance department has never been an easy task. Even when it was a matter of leather bound ledgers and quill pens it demanded controls and discipline. Now, in the digital age, financial directors and their teams are still struggling to cope with producing the right figures at the right time. If you believe the conference presentations and the marketing hype then your average finance directors have transformed their departments from functions that are inward-looking, focused on financial reporting and controls, to paragons of virtue that spend their day on creating value and inputting into strategic decision making.

Well, maybe a few finance departments have achieved that state of perfection, but most of the finance departments that I hear about are still on a knife edge of existence, struggling to meet competing demands from a variety of stakeholders.

Corporate scandals have created a climate of continuous regulation overhaul. Considerable effort is still spent on the traditional delights of cost control, management reporting, tax and treasury. And while most finance departments are able to deliver the historical financial reporting, they are much less confident in their ability to contribute to planning, budgeting and forecasting, and other management information.

The answer to most problems in life these days is technology, and the finance function is no exception. The continual investment in various forms of technology in a bid to improve transaction processing and reporting has got to be one of the primary characteristics in the development of companies’ finance functions over the past two decades.

Finance functions now rely on two key technologies – the spreadsheet and enterprise resource planning (ERP) systems. It is technology that has enabled and driven the continuing reorganisation of finance departments. If the industrial revolution saw manufacturing move from a cottage industry to the increased production capacity of the workshop and the factory, then the accounting function is undergoing a similar revolution in the rise of the shared service centre and the outsourced accounting function.

According to a KPMG/Economist Intelligence Unit survey, Being the best – Insight from leading finance functions, between 35% to 50% of companies now handle treasury management, finance reporting and transactions processing within a shared service centre. Those numbers are only going in one direction. Whether outsourcing or shared service centre becomes the preferred route remains to be seen. The shared service centre is, in essence, a form of external outsourcing, and seems to be gaining favour over outsourcing as a way of gaining some of the cost efficiencies of building document processing factories without some of the perceived risks and lack of flexibility.

One impact of corporate scandals is the investors’ desire to be more knowledgeable about the company’s financial strategy and how the company is progressing. This puts a continuous burden on the finance function. There is a certain irony in the fact that, while the finance function has been undergoing rapid change, the FD has been absent from the helm, instead assuming a greater responsibility for communicating and so spending time alongside the chief executive acting as the public face of the company. Investor relations increasingly equates to being able to communicate complex financial news.

Finance directors have traditionally delegated looking after the shop to FDs of subsidiaries, or financial controllers, but the shared service centre has altered that structure with the rise of director of the shared service centre, or deputy FD taking on the responsibility for systems and reporting.

With all this substantial change, and with increasing demands on all strata of financial staff, it is perhaps not surprising that many FDs believe thems elves to be in a war for talent. Moving the shared service centre out of employment hot spots may lower the wage bill, but it means that finance skills are not in abundant supply. A finance function needs skilled individuals and it needs to keep them motivated. The FD is also in a war for continuous improvement. Finance departments have a tendency to get set in their ways and become sleepy. That is when controls stop being performed and mistakes start to happen. Keeping things still for any length of time can start to stagnate the way people work. Processes and people have to be kept on their toes and kept lively. Setting challenges in the department, such as reporting figures more frequently, pushes people to step up a gear and not take the everyday for granted.

That workaday reality clashes with the desire of FDs to streamline and centralise the function so that the processing is more automated. The idea is for the finance function to concentrate on delivering and interpreting management information. But it still has to work hard on getting the basic bookkeeping right. Get that wrong and everything else is a waste of time.