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For four years Adaptive Planning has been building out its cloud-based financial software. Starting with budgeting, planning and forecasting, it added analytics, data visualization, dashboards and alerting as well as flexible reporting and collaboration tools. It recently announced the general availability of consolidation functionality in its cloud-based suite. This addition eliminates a notable gap in the company’s functionality, giving it a more complete financial performance management suite. The addition of the consolidation capability should increase its appeal to larger companies and broaden usage within its existing customer base. According to Adaptive Planning, already about one-fourth of its customers are organizations or parts of organizations that have annual revenue in excess of US$500 million.
Tools that automate statutory consolidation have been around for three decades. They are most useful for corporations that have ERP systems from multiple vendors and/or multiple instances of a single vendor’s financial software with different charts of accounts. Yet use of consolidation software is not ubiquitous. Our benchmark research Trends in Developing the Fast, Clean Close found that among companies with at least 100 employees, 26 percent use a dedicated consolidation system, 38 percent mainly use their ERP system and 30 percent use spreadsheets. The research also shows that 45 percent of midsize companies (those with 100 to 1,000 employees) and 62 percent of large and very large companies (those with 1,000 or more employees) have multiple ERP system vendors. (Most businesses with fewer than 100 employees have a single ERP vendor.) More companies with multiple ERP vendors use dedicated consolidation software than those with a single vendor (36% vs. 10%); the software speeds up the process of combining data from disparate systems. These organizations often get better results as well, the research reveals. Corporations that use dedicated consolidation software are more satisfied with their ability to manage the close process than those that use their ERP system and considerably more satisfied than those that use spreadsheets. Dedicated consolidation systems typically are more adept at managing the accounting close for companies that have complex ownership structures, which need to report results in multiple jurisdictions that have different accounting standards and different currencies.
At this point, our research finds minor differentiation in basic features and functions among products for consolidation software. Buyers’ preferences most often are shaped by their assessment of how easy it is to use a given vendor’s product, how well the software aligns with their existing business practices, the total cost of ownership, how closely the software fits with their company’s internal IT requirements and the degree to which a company prefers vendor standardization.
Yet even corporations with a single ERP vendor can shorten the time it takes them to close because process automation features can speed handoffs and quickly identify delays and bottlenecks. As well, using dedicated consolidation software often enables a company to reduce the use of desktop spreadsheets in the closing process because, for example, it can have calculations for common cost allocations built into the system (as Adaptive Planning’s does). Our research has consistently found that heavy use of desktop spreadsheets results in more errors and that resolving these errors consumes time and resources. On average, companies that are substantial users of spreadsheets in their close said they could save 1.7 days if all errors in the close were eliminated, compared to just 1.1 day for those that use spreadsheets infrequently in closing.
Adaptive Planning’s software has a prebuilt connection with NetSuite and can incorporate financial and accounting data from cloud vendors such as FinancialForce, Intacct and Workday, or from on-premises vendors such as Infor, Microsoft Dynamics, Oracle, QuickBooks, Sage and SAP through direct or flat file connectors. As the number of systems deployed increases, especially in larger organizations, Adaptive Planning will be able to demonstrate the ability of its existing users to handle the data loads required by prospective customers.
One significant challenge Adaptive Planning will face in gaining customers is the reluctance of finance department buyers to choose cloud-based systems over on-premises ones. Our research shows that 43 percent of those in the finance function prefer on-premises software compared to 22 percent who prefer cloud-based deployments. One of the top reasons companies still give for avoiding the cloud is security, a concern cited by 59 percent of organizations in our recent research Business Technology Innovation. I think such concerns are short-sighted and expect objections to cloud deployments to subside rapidly over the next several years since, especially for midsize and smaller enterprise buyers, cloud-based systems can be more cost-effective and more secure than on-premises alternatives. One of the bigger opportunities for Adaptive Planning is to increase adoption of consolidation software by midsize companies, which are more likely to be using capabilities in their ERP systems and/or desktop spreadsheets to manage and support the process. These companies may have found on-premises consolidation systems too expensive. In regard to cost, their finance departments may find that automation and reporting capabilities of the software can reduce the resources they are now devoting to purely mechanical functions that have little business value, while they also speed their close and gain more time and resources to provide a strategic perspective on the company’s performance and prospects.
Robert Kugel – SVP Research
I’m wondering whether the rapid rise in earnings restatements by “accelerated filers” (companies that file their financial statements with the U.S. Securities and Exchange Commission that have a public float greater than $75 million) over the past three years is a significant trend or an interesting blip. According to a research firm, Audit Analytics, that number has grown from 153 restatements in 2009 to 245 in 2012, a 60 percent increase. What makes it a blip is that the total is still less than half the number that occurred in 2006 as the Sarbanes-Oxley Act began to take effect. As well, the number of companies restating is still less than one percent of the total. Yet it’s a blip worth paying attention to, since the consequences of a restatement pose a serious professional challenge to finance executives. The right software can help address some of the underlying causes that lead to the need to restate earnings.
Several factors are behind the increase in restatements. One of the more important is a rise in the vigilance of the Public Company Accounting Oversight Board (PCAOB), an auditor’s auditor created by the Sarbanes-Oxley Act to assess the quality of reviews performed by public accountants. The PCAOB was created because there’s an inherent tension in the relationship between external auditors and their clients, driven by three main realities. The first is that accounting is not bookkeeping; the latter is a process of factual data entry, while the former is a matter of interpreting the facts and making a range of estimates (such as the useful life of assets, future liabilities and tax expense, to name three) to present an economically accurate, coherent picture of the financial health of an organization. For that reason, an audit is called an opinion, which itself is the product of judgments and interpretations. Despite the increasingly rules-based nature of U.S. accounting standards, companies make a large number of assessments and estimates in preparing their financial statements, and auditors pass judgment on the reasonableness of them.
The second source of tension is maintaining the delicate balance between, on the one hand, having an external audit team that understands the underlying business and, on the other, maintaining “auditor independence,” a neutral relationship between the auditor and the corporate client. The two are interrelated because personal relationships develop over time that can affect this neutrality. Wisely, calls to impose “term limits” for audit firms (that is, requiring public companies to switch auditors periodically) went unheeded, because despite the risk posed by chummy relationships, a revolving door for auditors would have been expensive, burdensome and possibly counterproductive. The PCAOB was created precisely to ensure that neutrality is maintained through adequate oversight within audit firms.
The third factor is money: Auditors are paid by the companies they are reviewing. Most auditors have high ethical and professional standards; some do not.
There are two notable areas that driving the earnings restatements. One is the growing complexity of using US-GAAP in a world of increasingly complicated multinational businesses. The second is tax-related mistakes.
Over the past three decades, the Financial Accounting Standards Board, which is charged with codifying generally accepted accounting principles (GAAP) for the U.S., has adopted more of a rules-based, highly prescriptive approach to US-GAAP. Revenue recognition, for example, has snared many companies because it can be extremely complicated to administer, especially if people make mistakes in structuring and drafting contracts. Outside of the United States, most countries have adopted International Financial Reporting Standards (IFRS), which as applied is much more principles-based. The main advantage of principles-based accounting is that applying broad guidelines can be practical for a wider variety of circumstances. As well, rules-based systems offer no guarantee of the quality of reporting, since such precision can be used to manipulate accounting statements to produce more flattering numbers than what would be allowed in a principles-based regime. Accounting for taxes has grown more difficult as tax codes have become increasingly convoluted and corporations have had to become more precise in their treatment of this expense. As I’ve noted, direct (income) taxes are challenging, especially for companies with complex structures and those that operate in multiple jurisdictions, which is why companies increasingly find the need to integrate tax departments more completely with finance.
Software can help reduce the chance of a restatement in a more demanding and complex environment. Our Trends in Developing the Fast, Clean Close research found that companies are taking longer to complete their accounting cycles compared to five years ago. Companies that have multiple financial systems can close faster if they use a dedicated financial consolidation system rather than spreadsheets. The Research shows that the time required to close is correlated with the degree of automation in the closing process – automation that consolidation systems support. The time saved on consolidation can be reallocated to more reviews of of the substance of the financial statement. The research also shows that companies that limit their use of spreadsheets experience fewer errors in preparing their financial statements.
Software also can play a bigger role in direct tax provisioning. Currently, most companies use desktop spreadsheets to support the tax data management, analysis and calculations that underlie their direct tax provisioning process. Companies need better control of this process and the underlying data so they can manage taxes more intelligently with less risk of having to restate.
In recent years there’s been increasing attention paid to the activities that take place between the completion of the financial close and when a company publishes its financial results. The “close to disclose” cycle involves coordinating the multiple disparate but interconnected threads that have to be orchestrated to complete the post-close external reporting tasks accurately and on time. It is a repetitive periodic activity that benefits from process optimization and automation. Software to automate the close-to-disclose process, which can substantially reduce the effort required to complete the work, enables tighter control of the data that goes into financial statements and filings, allows more time to review accounting estimates and treatments and therefore decrease the chance of an inadvertent error.
Earnings restatements may have increased in recent years but they are still a rare event. One reason for their relative rarity, though, is the enormous effort finance departments must expend checking and rechecking their work. Automation, better data management and a reduction in the use of desktop spreadsheets all contribute to reducing the risk of material errors and enable finance departments to allocate their resources to more intelligently to ensure that financial statement production efforts focus on sound judgment because there are fewer silly mistakes to spot.
Robert Kugel – SVP Research