Whilst researching for this article, I came across the following title of a book – “Late Adjustments: A story of love, grace and courage”. I can certainly agree with the need for courage, but love and grace? Two words furthest from my mind when I remember the times that I have been embroiled in Late Adjustment processes.
Firstly, a definition. By Late Adjustments I don’t mean the year-end accruals, or those adjustments that the auditors make you book the day before they are due to sign the accounts, although these may fall into this category. Rather, these are the adjustments that your subsidiary entities send through after the cut off for submissions has past and insist that they are necessary. As the consolidation accountant, it is now your job to tell all the other finance teams that the models they have run and the reports they have sent to the board/audit committees, will change, unless you were ‘lucky’ enough that the message went direct to the FC or CFO who then tells you that the early night, gym session that you had promised yourself (in a pre-Covid world, of course) will have to wait another day.
No one likes them, and with ever tightening deadlines, they cause a lot of friction between Group and the Businesses, yet keep occurring time after time, close after close.
Below are two groups of activities to help your Finance team to better manage these the next time they occur:
Reduce the number of late adjustments
The obvious way to minimise the impact of Late Adjustments is to aim not to have any. The following approaches will assist in that goal.
- Before you even start the current close process, you should analyse previous late adjustments and see if there is a common theme. These could be transaction, process or business driven. For example, if there is always one business that has late adjustments, understand why this is the case. How do the processes vary from one business to another? In doing so, you may identify some common best practices, or special treatment for certain transaction types, such as using prior period balances as an estimate.
- If it is a common transaction causing the problem, consider if your timetable can be adjusted to cater for it, or even have a separate submission for the offending transaction. Using the previous example, pensions, this way everyone will know not to look at the pension numbers until this latter submission.
- Schedule regular catch ups during the Close process, including having a conversation the day before submission so that you can identify potential issues in advance. For example, you may accept an estimate of an entry as opposed to having to wait a couple of days for an accurate figure. When the more accurate figure finally comes through, at this point you can complete a materiality analysis.
- Review your processes and issues after each period close. This may be the best time to reflect and determine the much-needed improvements to hold you in good stead next time
- Send metrics back to Businesses after each period Close, as part of the wider feedback. It is also important to assess the impact of each late adjustment on your Close process. If a late adjustment was processed but did not impact the process, for example an impact on a disclosure note that hasn’t been run yet, then treat this with less severity than an adjustment that does cause problems and changes to your planned Close process. These metrics should have a high visibility, in other words, provided to the Business FC or CFO.
Manage the adjustments better
The key to this is to have a Late Adjustment process, documented and published. There may be a separate one for auditor’s points, which do tend to come later but all processes should be built on same basis:
- Apply materiality thresholds. This may vary by account and at year end, for example. These should be discussed with your auditors.
- All Late Adjustments need to be recycled through the General Ledger. Making adjustments in Excel, or in other reporting tools, lacks controls and will cause reconciliation issues in next period.
- A fixed-format Late Adjustment Request template should be completed by the Businesses. I have found that a template in the form of a journal, a separate one for each transaction, also showing the impact of the proposed change on KPIs, works best and avoids confusions on signage.
- A daily triage meeting should be set up with all the key stakeholders to approve or decline the proposals, and where possible, the Late Adjustment Requests should be distributed to key stakeholders in advance so that the meeting is only spent discussing contentious changes and giving approval, or not.
- There should be a timely response to the Business so they can process the changes rapidly.
- There should be a tracking mechanism to validate the changes to Financial Statements. I have seen occasions when a Business has tried to sneak through other changes to the one approved, causing further challenges at Group level.
Be careful with the communication, if people see an opportunity in the timetable they will work towards it. I suggest the following wording in the Close instructions “we do not expect any adjustments after the cut-off period, but in the event they do arise (business auditor requests for example), then you should follow the process laid out below.”
Late adjustments only account for a very small percentage of the transaction volume, yet proportionately account for a lot more time, often unplanned and very unwelcome. It’s one of these processes that really does warrant a dedicated process and appropriate controls. If not only to expedite the Close process, but for the sake of my or your Financial Close Manager’s sanity.