Year-End Audit: Digital Transformation

The year-end close process is akin to the ‘day of reckoning’ for most organizations, a time when previous employee errors and short cuts, which were swept under the rug throughout the year, come back to haunt the staff members responsible for balancing the books. The time and resources spent tracking down, verifying, and consolidating relevant financial and administrative documents is multiplied exponentially when these documents are spread across multiple systems or individuals’ computers. According to our 2016 Enterprise Content Management Report, most organizations receive at majority of invoices in paper format, enter details into an ERP system manually, and file them in hard copy. In this post, I’ll examine several areas of the year-end close process, and how they are often adversely affected by these manual methods.

Human Resources and Payroll

Let’s begin with year-end close process for HR and payroll. Perhaps an employee was mistakenly reimbursed late for a purchase made in a previous period, and no receipts can be found. Or perhaps only a portion of an organization’s seasonal labor expense should be recorded as an expense and liability accrued during this fiscal year, but some department managers simply submit a total amount paid, with no details as to when or if the work was completed. The result is that, come year-end close, there are debits and credits recorded with no associated paper or digital trail that can only be cleared up with a phone call or email. This makes year-end close processes time-consuming and expensive, and it prevents HR from being able to accurately report on expenses by employee or department.

Even when employees submit requests and reimbursement through approved channels, just maintaining a handle on all of the documentation that floods HR and payroll departments is a challenge. Health insurance, 401K, employee giving, and bonus/incentive programs all generate forms that must be completed and signed by employees, and the result is a staggering amount of paper that often necessitates its own storage facilities. Though some of these forms may be digitized, many organizations are in a hybrid state of transition, where some paper has been eliminated through ad-hoc and bolt-on solutions, but some stubborn paper workflows remain in various departments around the organization.

Vendors and Contracts

When gathering and recording transaction data for the entire year, accounting staff is also tasked with verifying that purchases are made exclusively through approved vendors. Highly efficient, “innovator” organizations will have a single vendor master utilized by all departments that is dynamically updated to reflect changes in vendor contact information and contract terms. In these organizations, there is very little to do at year-end close to verify that purchases were made through approved vendors because unauthorized purchases were prevented on the front end. For organizations reliant on manual processes, or transitioning to a completely digitized purchase-to-pay system, the year-end close process will prove more difficult.

Departments often vary in how diligently they adhere to the approved vendor list, making ad-hoc purchases for one-time or urgent needs, promising to go back and file required paperwork later. Sometimes, though, they get busy and steps get missed; they update remittance information for an approved vendor, but that information is not updated across the organization. The vendor then calls to inquire about a late payment, and in the resulting confusion, the expense is recorded in the wrong month, leaving a tangled web of emails, phone calls, and approvals for closing staff to sort through before making the necessary adjusting entries.

Sales

The same holds true when double checking that all sales orders and customer commitments have been met during the year. When a payment is made by a customer for a good or service, especially if it involves a partial payment or discount, the amount paid may not match the purchase order. Unless accounting staff has clear documentation as to why, they are left to track it down manually. A single system of record where supporting documentation is integrated directly with an ERP platform can act as a set of checks and balances, providing much-needed explanations, especially for atypical sales transactions.

Finance Ramifications

The culmination of all of these issues that build up during the year is an error-prone, time-consuming year-end close process. It becomes difficult for staff to accurately produce all the required external financial statements on which C-level executives base their business decisions. Simply eliminating paper is not enough. As previously noted, many organizations are somewhere in the midst of transitioning to digital processes, but often, paper has been converted into PDF documents or other formats and sent via email, and the data must still be extracted and entered manually into an ERP system.

Innovators have developed strategies to overcome the roadblocks to efficiency that these formats create. While financial process solutions primarily manage structured and semi-structured documents, such as invoices, POs, and receipts, ECM software extends to many other types of semi-structured and unstructured data, including photos, videos, webpages, slide deck presentations, blog entries, Word documents, and emails. ECM solutions like KwikTag also organize the data in searchable document libraries, and keep track of documents’ histories with audit trails. This provides important protection against compliance and regulatory risk that is inherent in paper filling systems.

Because the year-end close process involves data and documentation from every area of a business, innovators look for ECM solutions that extend far beyond simply managing AP, HR, contracts and other financial documents, but that serve as a single repository for all content, collecting the information within a uniform structure. This enables a standardized year-end close process that enables to accounting staff to confidently, and quickly, create more reliable financial statements and prepare for audits.