The Hidden Secret to Superior Financial Reporting: Chart of Accounts
Across 15 years of working with Finance and Accounting (F&A) solutions, I have had many clients share tales of their struggles with finance reporting despite investing in reporting tools, replete with redundant manual effort and reconciliation challenges. My first question to them is “Well, have you looked through your Chart of Accounts?
Chart of accounts (COA) is a listing of the accounts that you have defined and used for recording accounting transactions in your financial book. Typically, the COA lists the accounts in the following structure:
- Balance Sheet: List of accounts pertaining to assets, liabilities and owner’s/ shareholder’s capital
- Profit and Loss: List of accounts to record income and expenses
COA has always been considered as a key to transaction accounting. However, its significance is not just limited to accounting. When combined with other functional dimensions, it holds the key to enhanced external as well as internal reporting.
How do you gauge the profitability of your product and/or service, a particular store or geography, or a mix of these? Doing this needs appropriate accounting of your transactions (revenue and cost) across various business functions. An organization should thus tailor its COA to best suit its tracking needs across all business functions. To achieve this, the COA design and review activity should ideally have representation not only from the financial accounting team but also from financial planning, tax, treasury, controllers and business units. In other words, you should aim to develop a multi-dimensional COA.
A multi-dimensional COA facilitates deeper insights for your organization. It enables you to fulfil the ever increasing needs of various statutory, operational and management reporting requirements. However, this is easier said than done. The following questions can guide you through the process of identifying information needs across functions and streamlining them into a COA.
Who needs what information, when, how, and using which channel?
- Who: Refers to the various functional and hierarchical reporting levels across the organization; for example, finance, purchasing, product heads, compliance, and so on.
- What: Refers to the granularity and form of information needed; for example, summarized, detailed, KPI dashboards, graphs, trends, analytics, etc.
- How: Refers to how you want to slice and dice the information i.e. dimensions; geographical, product or services dimension, etc.
- When: Refers to the time dimension of reporting (frequency as well as time period covered)
- Channel: Refers to the channel used for delivering the information; for example, MS Excel, ERP, mobile, etc.
Does your COA link Posting COA to Reporting COA?
Posting accounts are the lowest levels of accounts where transactions are posted to your financial books. Management reporting happens at many different roll-up levels, which are represented in the reporting COA. A hierarchical layer in the COA (from Posting COA to Reporting COA) helps link the two and ensures effective roll ups from posting COA to reporting COA.
Identifying answers to the above questions and appropriate actions to enhance your COA can open doors to:
- Faster reporting
- Enhanced data integrity and compliance
- Lean processes
- Reduced risk of errors
A Clients’ Story
A European client, with operations across the globe, was running F&A functions on Oracle EBS R12 with Hyperion Budget Planning and Oracle Finance Analytics. The CIO and CFO wanted to enhance their reporting capabilities to make it faster and efficient. They also wanted online reports available to business leaders who could act on them in a timely manner. When we looked through their COA, we found the following challenges:
- COA was defined 15 years ago and never revisited later
- Around 50% of COA values were redundant
- Hierarchical structure was defined for each of these 15 years but effectively, only ones defined for two years (current and previous financial year) were used
- Hierarchical structure did not represent the actual organizational and reporting structure of business
After revising the entire COA to fix the identified challenges, the performance of reports improved by around 40% (on a case-to-case basis). The changes also helped the business to extend the reports to over 200 business leaders, who can now look at their numbers anytime online.
Constantly changing business dynamics can make your COA redundant and inefficient over a period of time. It is extremely important to define, and thereafter revisit, your COA every three to five years (if not more frequently) and sync them with your business dynamics. This exercise should be supplemented with a strong communication and change management process.
I am by no means suggesting that COA is the only place to look at for enhancing your F&A reporting. However, it is most often overlooked. If you are facing similar challenges in your reporting chain, I’d suggest looking through your COA first.