Ventana Research Analyst Perspectives

The Central Ledger: Restructuring Accounting with Technology

Posted by Robert Kugel on May 22, 2020 3:00:00 AM

Sometimes it takes a while for technology to fundamentally change how work is done. That’s because several innovations usually have to come together before a transformation can occur. For instance, Karl Benz created the first practical motorcar in 1885, but consumers would have to wait until the 1920s for the modern automobile. Computerized accounting systems originated in the 1950s but it’s only now that technologies have evolved and come together to fundamentally change how work is done.

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By spreading workloads more evenly over accounting periods, continuous accounting can reduce staff stress and shorten the monthly and quarterly accounting close.

For several years I’ve been using the term “continuous accounting” to describe an approach that enhances the quality of accounting processes. By spreading workloads more evenly over accounting periods, continuous accounting can reduce staff stress and shorten the monthly and quarterly accounting close. Technology is the foundation of continuous accounting.For instance, automating data movements eliminates the need for human intervention, which can result in errors. Using workflows to guide the close process ensures consistency and significantly reduces dropped balls that delay completion. And by automating rote, repetitive work, the accounting staff must deal only with exceptions. Supervised data entry is another component of continuous accounting. Artificial intelligence (AI) using machine learning (ML) can supervise accounting entries to spot anomalies that might be errors or that omit necessary information. This reduces downstream workloads by eliminating most avoidable errors at the source and produces a cleaner set of books.

Another transformational technique is a “continuous virtual close.” That is, rather than waiting until the end of the month to prepare consolidated financial statements of the various divisions and legal entities, the CFO and financial executives can create a “virtual close” at whatever frequency they wish. A virtual close is one where consolidations, eliminations, accruals and other adjustments are created in the system but not posted as transactions. This approach produces pro-forma, intraperiod financial statements that are extremely close to what a “real” accounting close would produce but does so almost automatically. Practically no staff time is required and the general ledger and subledgers aren’t cluttered with entries and the inevitable slew of adjustments.

Until recently, most ERP or financial management systems could not perform a continuous virtual close because they lacked the database structure and in-memory processing capability to be able to perform the process in any practical way. That’s changed. These systems also have increasingly powerful analytical capabilities to calculate all sorts of allocations and accruals. And the cost of memory and processing power, especially in the cloud, is approaching trivial.Ventana_Research_Benchmark_Research_Next_Generation_ERP_08_ERP_fragmented_in_large_companies_

Performing a continuous virtual close is more complicated for organizations that use multiple vendors’ ERP or financial management systems. This is not uncommon: Our Next-Generation ERP benchmark research finds that only 31 percent of organizations with 1,000 or more employees use software from a single vendor, while 27 percent have systems from four or more vendors. Arriving at a consolidated set of financial statements when accounting transactions are recorded in multiple systems is a time-consuming task even when using a modern consolidation system. One possible solution is having an accounting structure I’ll call a “central ledger.”

A central ledger is one where all accounting transactions related to a single business entity with multiple accounting software systems are recorded in what almost always is the headquarters system. Having all transactions in a central ledger means that all accounting transactions recorded in other ERP or financial management systems are “cross-posted.” Cross-posting means that every accounting entry is recorded in both the headquarters and the other system simultaneously and the same way. The headquarters accounting system effectively becomes the book of original entry for the entire corporation and is entirely faithful to transactions recorded in all of the other systems.

Combining all of the accounting transactions in a central ledger with a database structure and in-memory processing designed for speed enables an organization to rapidly generate intraperiod headquarters-level consolidated statements using a limited amount of incremental staff time. Organizations that use technology to spread typical period-end activities such as reconciliations over the accounting period (say, changing month’s end tasks to week’s end tasks) will have a virtual close and resulting intraperiod financial statements that are that much closer to what an actual close would have been.

The process of cross-posting is essential for a central ledger structure, but it also can cut staff workloads by eliminating inconsistencies that must be reconciled. This can occur when an intracompany transaction is recorded in a company’s accounting system. It’s typical that when Division A of a company sells a part to Division B, each division’s accounting department records the transaction separately. This can lead to inconsistencies through, for example, clerical errors, such as differences in when the transaction is recorded or when two divisions use different currencies and the currency translation is incorrect or inconsistent. Discrepancies such as these create extra work that adds cost but no value. If the company cross-posted every intracompany transaction, it would eliminate the need to reconcile most of those transactions, saving time and improving the quality of the accounting process.

Technology is driving significant change in the office of finance. Continuous accounting applies modern finance technology — and the more flexible process management techniques it permits — to increase both accounting efficiency and finance department effectiveness. Finance organizations increasingly are accepting continuous accounting, but the practice is far from universal, yet. Over the coming decade, the confluence of multiple technologies will transform how finance operates more than has been the case over the past 50 years. Technologies including database architecture, in-memory processing, artificial intelligence, machine learning, bots, enterprise data management and cloud computing will transform how all aspects of the office of finance works, including accounting, planning and analytics, budgeting and closing.

The concept of the central ledger — a new approach to structuring an organization’s accounting systems — supports continuous accounting. CFOs and controllers, especially those in larger organizations with multiple disparate ERP systems, should become familiar with the idea and have a roadmap to implement the approach as soon as is practical.

Regards,
Robert Kugel

Topics: ERP, Office of Finance, close, closing, CFO, controller, Financial Performance Management, ERP and Continuous Accounting

Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.