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The Secret FD’s consolidated headache

I HAVE TAKEN an interest in the forthcoming integrated reporting framework while also considering how to improve my automated financial consolidation infrastructure and processes – both with healthy scepticism.

Few accounting subjects can be so different in practice from the theory we studied as financial consolidations. I remember being taught how we should reconcile the intercompany accounts, do the eliminations, then add it all up, but this is hopelessly naive and misleading advice which completely ignores the realities and career-threatening struggles that make an automated process such a monumental challenge.

In addition to the plethora of non-financial information necessary for a comprehensive consolidation, my experience is that we face at least four competing and entirely contradictory consolidation streams, each with their own challenges at each sub consolidation level.

Consider the differences between statutory, tax and treasury consolidations – each with its own trick dimensions such as regional versus product versus management versus currency. Complexities arise from abuse of varying FRS and GAAP systems, exchange rates and calendars. Consolidations include data streams on budgets, forecasts and other fictions. Subsidiaries are likely to use a wide range of accounting systems, and there is no one-size-fits-all chart of accounts. Inconsistencies arise from the differences in tolerances and materiality levels, so accuracy is debatable. Consolidations can be called for on a daily, monthly, quarterly, annual and ad-hoc basis.

Sub-consolidations also present specific demands, and financial subsidiary FDs are reluctant to allow the next level in the hierarchy to see their data until they are prepared to release it, and so cause delays. Most people who provide the input to the consolidation derive no benefit from it, but are focused on the risks of negative press if they should report adverse results or be found to be in error. This has to be managed.

Of course, there are some credible suppliers of applications and these are moving towards a cloud-based approach which introduces new challenges to security, but provides advantages such as up-to-date application software. However, these tools can work only when the FD has addressed the business and people issues that form the backbone of the consolidation process.

As if this nightmare were not enough, the next challenge is to consolidate a holistic view under the forthcoming Integrated Reporting (IR) framework being developed by the International Integrated Reporting Council, and this will also be inflicted upon those of us lucky enough to have escaped the poisoned chalice of consolidation. Mercifully, IR is still at the consultation stage.

The proposed IR framework aims to report a comprehensive view of the organisation, focus on ‘capitals’ – classes of input upon which the organisation depends – and ‘outputs’ that are far-reaching. IR calls for information on the following: overview, governance, risks, strategy, resources, business model, performance and outlook. Traditional financial information forms only a limited part of the report.

So the FD must lead the initiative to implement IR, especially in organisations not receptive to reporting anything beyond the legal minimum or incapable of providing this information to a credible standard. One danger is that the FD might be blamed for creating a burdensome infrastructure which management does not see as adding value. Another danger is that someone else could take the initiative to lead the project which is inconsistent with the evolving role of the FD.

I believe IR will be adopted and it should be led by the courageous FD who should enlist the backing of the board. This will enable the FD to adopt a role as a public face of the organisation. But given the inherent challenges of consolidation processes, this IR initiative calls for some careful thinking by FDs. Nevertheless – I am all for it.

Last month the SFD attended The British Library exhibition on propaganda (a poorly understood word) and was pleased but surprised that there was nothing about corporate reporting.

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