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Finance departments don’t immediately come to mind in conversations about social collaboration technology. Most of the software used for social collaboration that I’ve seen demonstrated focuses on the 
sales process or for broader employee engagement. The Facebook-style interface may cause finance department managers and executives to roll their eyes, especially if they’re over 40 years old. Yet business and social collaboration is an important set of capabilities that has been taking hold in business. Our benchmark research shows it ranking second behind analytics as a technology innovation priority. It will gain adoption over the next several years as software transitions from the rigid constructs established in the client/server days, which force users to adapt to the limitations of the software, to fluid and dynamic designs that mold themselves around the needs of the user. Perhaps because most of the attention so far on the benefits of collaboration has focused on front-office roles, there’s less awareness of the potential in back-office and administrative functions. Indeed, the same research reveals that those in front-office roles five times more often than those in accounting and finance roles (21% vs. a mere 4%) said that business and social collaboration are very important to their organization. However, I assert it’s just a matter of time before the finance group understands that social collaboration has substantial potential to improve its performance.
In examining why this change will occur, let’s start with some background. “Doing business” is all about collaboration, on which my colleague Mark Smith commented in an earlier perspective. Before communication technologies began to eliminate the constraints of time and space, people relied mainly face-to-face collaboration. (Postal letters were another option but they were very slow and limited interaction.) Voice mail was the first breakthrough in enabling people to collaborate quickly across time and space. Busy individuals could conduct conversations through a series of voice messages, discussing an issue in some depth and agreeing on an approach without speaking in real time. Much of business investment in information technology over the past two decades has been aimed at enabling good communications among different elements located in separate buildings, cities and even countries. The same is true for finance.
We all know that the eruption of social media – in both group settings like Facebook and one-to-many channels such as Twitter – has changed the dynamics of how people – especially those under the age of 40 – communicate. A couple of years ago, a group of teenage girls became trapped in a sewer under Adelaide, Australia. It took several hours to rescue them because the one with a phone used it to post their plight on her Facebook page rather than call someone. This example may be extreme, but it illustrates intergenerational differences in expectations of how one communicates. As with IM, software companies that build business applications are beginning to include Facebook- and Twitter-like capabilities to support collaboration. Examples include application platforms such as Salesforce.com’s Chatter, IBM’s Connections and stand-alone software that can be integrated with another vendor’s offering such as Socialtext that is now owned by Peoplefluent. Software that fosters collaboration can improve efficiency, for example, by resolving issues faster or finding easier or less expensive alternatives to addressing a need. It can improve effectiveness by improving customer satisfaction or enabling more informed decisions sooner. It can foster better alignment across business units as well across and within departments by enabling closer communications among their people.
Social collaboration is off to an encouraging start, but it’s easy to see where improvements are needed, especially to be useful to the finance function. Ideally, collaboration software will be able to understand the context of the work at hand, the role of the individual participant and the relationships the individual has with others in that context. A technology like Google Glass has the potential to enable a manager, while reviewing a report, to see that there have been comments posted related to specific numbers, text or charts and then select and read these just by moving his or her eyes.
As well, software imbued with social collaboration capabilities should understand and automatically manage the various types of relationships among individuals. For example, people in a company typically have a general role (“I’m in Finance”) and one or more task-specific ones (“I’m the director of financial planning and analysis”). Some relationships are persistent while others begin and end with a project. Issues that arise may be open to all or confined to specific groups, subsets of groups or a private dialogue. Queries or comments may be general, specific or somewhere in between. Some conversations, especially in finance and tax departments, must be tightly controlled. Software that understands the context of the work performed and automates the process of managing the who, what and when of the communications will support more effective collaboration, faster completion of tasks, greater situational awareness with the organization and as a result better decision-making.
Which brings me back to the relevance of social collaboration for finance professionals. There are many use cases for comprehensive collaboration capabilities in ERP or accounting and financial performance management software. A good deal (maybe too much) of what goes on operationally in finance departments involves checking details and correcting errors – activities that require direct communications. Resolving billing issues could be streamlined if receivables and sales or payables and purchasing were connected to the appropriate collaborative network in the context of executing business processes. For example, end-of-period reconciliations could proceed faster if communications among the right people in the departments involved less effort. The financial close has multiple steps where time saved by resolving snags or clearing up ambiguities consistently can have a meaningful impact on shortening the process. Likewise, planning and review involve a great deal of collaboration, especially in understanding assumptions and expectations or providing perspectives on causal factors behind better or worse than expected results.
Unlike those in sales and marketing, the stereotypical accountant and finance specialist is not thought of as “social.” And at the moment, few people working in finance departments say that social collaboration capabilities are very important to their jobs. An important aspect of my research agenda for this year points to the need to address the demographic shift from executives and managers from the baby-boom generation to those who grew up with computer technology. These shifts will drive demand for a new generation of software, one that emphasizes IT-enabled collaboration, mobility and agility. Social collaboration used in business applications should be more than a Facebook metaphor. It addresses a key drawback of instant messaging systems: the fact that in business, individuals have multiple roles and multiple networks of people with whom they interact. When tightly integrated into business software of all kinds, social collaboration will become an essential capability by enabling people to resolve issues faster and with less effort than other means of communication. Vendors that focus on the finance function should ignore today’s lack of enthusiasm for social but more practical collaborative capabilities and ensure that their software is designed for the next generation of financial software users.
Regards,
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.
Regards,
Robert Kugel – SVP Research
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