The systemic impact of faulty economic models and poor financial decisions based on non-existent collateral continues to be a topic of great concern, across the globe.
Many of these decisions were either based on an inaccurate, overly-optimistic assessment of the businesses' financial health or mere neglect on part of the management to even make such assessments.
Both of which could have been prevented through better financial disclosure management practices.
In a previous CIO UK article from Aberdeen Group entitled, How to Work with the Finance Department, 54 per cent of financial executives cited the need to dynamically account for change and to adapt to these tumultuous economic times as a key market driver for exploring better financial reporting and management processes.
Additionally, external and internal drivers such as corporate mandate to improve data quality (42 per cent) and executive orders to improve visibility into the future financial position (30 per cent), respectively, were cited as the other key drivers behind effective financial disclosure management.
What is financial disclosure management?
Put simply, it is a strategic combination of technologies and processes which enables companies to better manage and distribute key financial and accounting information to all stakeholders.
With regard to effective disclosure management, there is no one particular technology which can be bestowed upon the title of a Be-all, End-all.
Companies could decide to deploy one or a combination of technology solutions that may include:
- Enterprise performance management (EPM) solutions
- Accounting solutions
- Financial reporting solutions
- Financial planning, budgeting, and forecasting solutions
- Business intelligence (BI) / data analytics tools
- General ledger (GL) solutions
- Extensible business reporting language (XBRL)-based financial reporting solutions
- Governance, risk, and compliance (GRC) solutions; and enterprise resource planning (ERP)-based solutions
Companies which actively embrace, or are working towards adopting financial disclosure management solutions, realise cost benefits in terms of positive audits results, improved reporting accuracy and compliance — both internally and externally, and increased operational efficiency.
According to Aberdeen Group's August 2011 report entitled, Effective Disclosure Management: Ensuring Compliance and Improving Organisational Communication, leading companies reported a 92.2 per cent positive audit rate from all audits in the past five years, compared to 73.8 per cent audit rate for all others, by embracing effective financial reporting solutions.
Leading companies also reduced their cost of audits (including potential fines, penalties, and corrective labour from non-compliance) by 18.2 per cent, while remaining companies reported a 6.5 per cent increase in their audit and corrective labor costs.
This is almost a 25-point difference, substantial enough to impact the operational costs and profitability of a company.
Leading companies in disclosure management also indicated an 88 per cent reporting accuracy of actual-to-budgeted revenue, compared to about 56 per cent for the remaining companies.
Resource allocation and company strategy are both contingent upon having a clear insight into the availability of funds, especially in markets faced with liquidity issues.
Considering that budget allocation for IT initiatives still remains one of the largest challenges faced by CIOs today, achieving reporting accuracy can alleviate budgeting woes and help with project prioritisation.
Leading companies are able to gain this competitive advantage over all others by using a strategic combination of reporting capabilities and technologies.
For instance, top-performing companies are 18 per cent more likely to maintain a centralised repository of archived financial reports and filings, and 17 per cent more likely to maintain a centralised repository of regulatory information than all others (Figure 1).
The advantages become quicker access to financial data and information, and improved financial transparency to auditors.
Given that the IT department is responsible for implementing these solutions to ensure that they meet business requirements, buy-in from the CIO is critical for having these capabilities in place.
Aberdeen continues to find that leading companies are far more proactive than all others in adopting disclosure management technologies.
For example, according to the Aberdeen's April study on eXtensible Business Reporting Language (XBRL), top-performing companies are 3.33 times more likely to have XBRL solutions in place to standardise and expedite their financial reporting processes.
Finally, as is true for most initiatives, the success of disclosure management depends on management support and active involvement.
Transparency and compliance, pillars on which effective disclosure management rests, cannot be confined to a single department or level.
Lack of transparency or compliance in one area defeats the entire purpose of the exercise.
Therefore, it is important to view disclosure management as part of an organisational culture rather than as a one-stop solution.
Ankita Tyagi is a research associate of financial management & GRC at Aberdeen Group