Faster. Better. Smarter. In today's marketplace, these terms describe the expected. Faster response times, better communication tools, smarter computer chips. And now - under the Securities and Exchange Commission - faster, better, smarter closes.

An estimated 6,500 public companies will be subject to the new SEC rule requiring more timely closing and reporting - closing the company books and reporting results publicly. Some 75%, or 4,900, of those companies will have to make substantive procedural changes. The rest are either already in compliance, or can be with relatively minor changes.

Faster and smarter month end closes will be necessary in order to meet the new SEC rule requiring quarterly 10-Q reports to ultimately be filed 35 days after quarter's end and annual 10-K reports ultimately filed 60 days after year end. The current rule allow companies 45 days for filing the 10-Q and 90 days for the 10-K.

The commission intends for this reform to substantially improve both the quality and timeliness of information available to investors. Though it initiated the change before the Enron collapse, it has made the push to accelerate filings to improve investor confidence.

While a focus is clearly on more timely reporting, there is no doubt public and SEC scrutiny over financial results will be at unprecedented levels. Explaining its reasoning, the commission said communications and information technology make it easier for companies to process and disseminate information swiftly. Many companies, the commission said, speed to their teleconferences with analysts to announce their quarterly and annual financial results "well before they file their formal reports with the commission."

The result, said the commission, is that earnings announcements are generally less complete in their disclosure than quarterly or annual reports "and can emphasize information that is less prominent" in those reports. At the same time, it said, the current longer filing timeframe "means investors often make decisions without access" to more extensive information disclosed in the filings.

As it "hones" in on speed, the SEC, as well as the investor community, will also expect company management to provide higher levels of accuracy in the numbers, display a better understanding of the results and communicate those results in much richer detail. CEO's and CFO's will be pushed to explain variances from forecasts and changes from prior years as never before. If they don't, the markets and regulators will make them pay the price in stock valuations and investigations.

For many companies, meeting this rule will mean revamping the way their finance departments handle period-end closings and reporting. Some companies will make changes using internal resources; others will seek outside help.

Companies that must adjust, should consider the following 12 items:

Roll up your sleeves; don't look for silver bullets. There is no easy way to a faster, better, smarter close. It takes vocal, aggressive, visible commitment to improve closing and reporting at the top levels of an organization and determined attention to detail at the mid and lower levels. CEO's and CFO's must make a smarter close a priority, by leading the organization to focus on getting it done.

Expect to spend five to eight months.

That's the estimate for a billion dollar, multi-national company. Retooling your closing and reporting processes, will require three to four weeks to strategize goals and objectives and mobilize resources, the next two to three months to analyze and design and three to four months to test and roll out. The most successful projects implement "quick win" changes along the way to gain momentum during the project.

Use existing IT systems where possible.

Some companies worry they'll need to replace their current information technology, either software or hardware or both. Not true in most cases. Prod, tweak and enhance the legacy systems and they will likely produce the necessary data to allow the generation of consolidated financial statements in five to eight days.

What gets measured, gets done.

Put a calendar in place and hold people to it. If someone misses a deadline, take corrective action. Most people will move heaven and earth to keep from being the next person to be singled out.

Use estimates - intelligently.

Focus on interim data from key business units and explore opportunities to cut-off appropriate transaction processes a couple of days early. Develop sound estimating techniques to ensure

accurate month end numbers. Work with finance and operations leadership to plan the specifics of using estimates. Develop a clear methodology for how they're produced and establish materiality thresholds. After the close, circle back and analyze the actuals. True up if necessary.

Don't sweat the intercompany accounting.

At the end of the day it won't impact consolidated results, but it will eat up valuable time in the closing process. Remove the majority of intercompany accounting from the close. Cut it off at least two to five days early. Implement necessary changes to intercompany accounting policies and procedures.

Assign clear responsibilities.

Different departments play supporting roles in accomplishing the close and reporting financial results. From accounting, tax and treasury to legal, I/T, investor relations and public relations, specifically identify who should be charged with what activity and assign clear responsibility. Where responsibility is unclear, precious time can be lost.

Create a 10-Q and 10-K template.

Every word that goes into these documents can't be known in advance, but many can. Get the historical information ready prior to quarter or year-end. Attempt to get the Q and K about 80% complete before going into the closing and reporting drill.

Institute a clear resolution process.

Issues frequently pop up. So plan to get them resolved with finance and operations leadership in an orderly manner. Put a process in place and instill accountability to follow it.

Implement new policies and procedures; don't be afraid to change.

Implementing new policies, procedures and systemic enhancements can be a gut-wrenching exercise. But don't be afraid to change. Once you gain momentum, don't stop until you've achieved your goals and objectives.

Train your people.

Training empowers people to succeed in a new environment. To achieve a smarter close, procedural and systemic changes will be made. Without training, those who participate may make mistakes in doing their work and not know it. Get everyone in a room at the same time, demonstrate the changes, show how they'll benefit both the company and the employees who implement them.

Seize the opportunity to improve financial reporting.

While digging into the details to achieve a smarter close, it makes sense to critically assess financial reporting at the same time. Some companies fear a close AND financial reporting improvement project at the same time may be too much. Not so. It takes no longer to do them both simultaneously and requires just 10% to 15% more effort. To tackle financial reporting improvement separately would be from 50% to 75% more expensive.

There you have it - an even dozen. Twelve important issues to remember in achieving a faster, better, smarter close, whether companies change the process themselves or invite outside experts to help.

There is one more important point to remember:

Demand an implementable plan - one that is thorough and realistic. Unimplemented great ideas provide no value. Success only comes from implementation - getting it done - and it builds momentum for continuous improvement. This success will enable you to meet the SEC's new reporting requirements for a faster, better, smarter close.

 

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