Maintain Financial Compliance: How to Plan For Your Next Month-End Close

Thomson Reuters posted an article about 10 things compliance officers need to consider. In the article, senior regulatory intelligence expert Susannah Hammond addressed many challenges including how financial compliance officers within financial services dealt with the global pandemic while continuing to manage their firms’ existing compliance issues. 

“Now more than ever, corporate risk and compliance officers have been and need to remain at the forefront of preparing their firms for any and all eventualities.” – Susannah Hammond, Senior Regulatory Intelligence Expert

While Ms. Hammond focused her article on financial firms and agencies, compliance continues to be an important aspect of any business that wants to be prepared, not just for the immediate future but for the foreseeable future as well. 

This has become critically important since most companies’ boards of directors don’t put much thought into risk mitigation. 

A McKinsey survey found that most boards only spend about 9% of their time exploring risk factors even though only 6% believed they were managing their financial risks effectively. 

Mitigating Risk & Improving Efficiency with Internal Financial Controls

For compliance to be effective, you need to have a well-documented and detailed understanding of your month-end close processes. This allows you to identify key risks in your close so you can create well-defined internal controls.

Internal controls help organizations become more efficient while mitigating the risk of violating laws or committing fraud. By implementing these internal controls you can:

• Increase the reliability of financial reporting and compliance
• Improve compliance with applicable laws, regulations, and policies
• Increase the efficiency of your accounting operations

By implementing and following these internal controls, finance departments can fulfill their responsibilities and provide reasonable assurance that they’ve met all external and internal financial compliance requirements. 

As the demand for financial controls continues to grow, you need to understand how to implement control activities so you can streamline your processes and better identify your risks.

Work towards implementing financial controls and compliance measures that allow your organization to close quickly and correctly by downloading our eBook: A Guide to Control and Compliance.

How to Prevent Common Financial Risks in Your Numbers

The purpose of internal controls is to mitigate risks identified within your numbers. Equally important is the need for your personnel to understand the risks and how to prevent them. 

By implementing these simple internal control activities, your team can monitor, evaluate and improve your checks and balances:

• Existence – All inventory is found in the balance sheet at the close.
• Completeness – All assets, liabilities, and equity balances are found within the financial statements.
• Occurrence – All recorded transactions actually occurred. 
• Rights & Obligations – Your organization has the right to own and use all assets and liabilities found within the financial statements.
• Balance – All balances and allocation adjustments are recorded correctly.
• Cut-off – All recorded transactions took place in the correct accounting period. 

The Essential Elements of Internal Financial Controls

The most common internal control framework is the COSO framework provided by the Committee of Sponsoring Organizations of the Treadway Commission. This organization is a joint initiative of private sector organizations dedicated to providing thought leadership to combat corporate fraud. 

The COSO framework establishes five essential elements of internal controls that provide assurances that compliance is being met. 

The control environment is the foundation that sets the tone for all other internal control activities by giving you visibility into your potential risks. 

Risk assessment means identifying and analyzing risks that prevent you from meeting your key objectives. Potential risks include:

• Fraud
• Manual Errors
• Shared Spreadsheets
• Unclear Personnel Responsibilities
• Weak Policies and Procedures

Information and communication is an important element that determines how well your finance department is informed of internal control activities, their purposes and when they are updated. 

Purpose-built IT systems allow for the monitoring of your financial close process so you can identify and remove bottlenecks while testing and adjusting control activities.

Control activities are the clearly defined processes designed to reduce your identified risks. Examples include:

• Transaction Matching that reduces manual processes and human error
• Audit trails that prohibit personnel from accessing files or data outside of their defined roles

Case Study: Ruby Slipper Cafe Closes With Compliance Confidence

The Ruby Slipper Café, a restaurant chain with nearly a dozen restaurants across three states, was struggling with the tell-tale symptoms of an inefficient financial close, such as:

• Lack of standardization
• Lack of visibility
• Lack of efficiency
• Lack of governance

Without an automated accounting solution, all of the above can lead to inefficiencies and inaccuracies, especially if your accounting team is closing the books using a spreadsheet solution. 

The CFO, Jennifer Beougher, of Ruby Slipper Café identified the potential in an automated accounting solution to not only solve issues related to standardization, visibility, efficiency and governance, but as a safeguard of the enforcement of compliance standards.

Hear Beougher speak about her finance office’s transition to accounting automation and how it has empowered her team to work smarter and meet all compliance requirements in our webinar, “How to Leverage Financial Close Automation to Work Smarter: The Ruby Slipper Café Story.”

Strengthening Your Internal Financial Controls

When performing your month-end close, faster does not always equal better. Strengthening your internal controls is important so your close is accurate, in addition to being faster. To strengthen your internal controls, just follow these simple steps:

1. Create a Risk and Control Matrix. Document your processes and identify the related risks. Create and continuously review your internal controls that reduce those risks to an acceptable level. 
2. Integrate Your Controls. Your internal controls should be embedded in your documentation so it’s used consistently in your day-to-day activities. 
3. Monitor Your Control Performance. By monitoring your risks and controls, you can develop a high-quality internal control system that reduces risks at a reasonable cost. 
4. Automate Your Controls. Ensure your controls are automated and supported by your ERP system to streamline your processes and reduce the risk of errors. 

To ensure a seamless financial close, strengthen your internal controls and automate your workflows with Adra. If you’re interested in learning more about how Adra can provide you with confidence in your controls, book a demo here.