Your Finance System Is Not an Island

The many interactions between people and systems, people and people, and even between systems are often poorly documented, hard to follow and almost impossible to audit, writes Anastasia Weiner.

While it’s true that manual processes still have their place in all business systems, there are notable limitations. Not only are they typically labor intensive because of the number of paper documents and physical flows of information, every new transaction introduced to the process is a fresh event and relies on the internal controls environment operating effectively on each occasion for its successful completion.

Momentary lapses of control are inevitable in even the best-run organizations and depending on the process, even a single failure in control can have dire consequences. In theory, every single manual transaction exposes the organization to the risk of human error, and as volumes increase so does the likelihood of a mistake. Repairing processing errors after the event by unwinding transactions that have gone wrong can be time consuming and costly. If they affect customers directly – say, the delivery of the wrong goods – then reputations can also be irreparably damaged.

Collectively, businesses have been successful in driving down processing costs through successive rounds of automation, but recent studies show that changes in compliance regimes such as Sarbanes-Oxley and International Financial Reporting Standards (IFRS) have exerted considerable upward pressure on the cost of the finance function.

Although the challenges of automation should not be underestimated, material changes in key technologies such as the web, workflow engines, office productivity and communication tools – as well as underlying enabling technologies – means that once again, the prospect of a step-change improvement in process automation is well within reach.

New technologies have emerged in recent years that offer light, flexible approaches to process control, in contrast to some of the heavyweight solutions of the past. Web services for example, offer integration for the internet age and make linking systems very quick, easy to achieve and to maintain. This means that process control technology can easily link to and interact with ERP and other core transactional applications, retrieving or even posting data or simply reporting on findings.

Web browser technology and links with email mean that applications can be used to drive actions through an organization, automatically prompting individuals or delivering pertinent data to all those involved in the process. Forms technology and XML (eXtensible Mark-up Language) means applications can collect data from users or other systems, and deliver it to the appropriate location or system as required. Moreover, integration delivers assurances that the data has gone through appropriate checks and balances to achieve absolute accounting integrity.

But as Steve Pugh, CEO of CODA Financials, Inc., explains, although the ability to integrate applications is today quicker, easier and cheaper, there are some key guiding principles that need to be adopted for success.

“Companies need to clearly understand their own processes and how data comes in and out of the business,” he says. “Data should flow between systems. You shouldn’t have to adapt the processes to fit the technology, and you should be seeking to eliminate manual intervention wherever possible. Latest generation workflow technologies are quicker and cheaper to implement today and enable organizations to adapt their processes as markets or their business changes.

“The finance system needs to be a central repository for finance data that can support any level of complexity and change within the operation,” he continues. “This is vital for competitiveness and organizational control.”

HVB’s complex organizational and legal structure meant that having such a system was essential to keep pace with its growth. The bank, which is part of HVB Group – Germany’s second largest commercial and retail bank, now owned by Italian giant UniCredit – needed a system to support a large number of US incorporated subsidiaries and special purpose vehicles, including asset-backed commercial paper conduits.

“We have an incredible legal organization,” says Dominick Valente, Managing Director and Controller for HVB. “And that drove the need for a new system. There was growth in the number of entities and the size of the balance sheet. We simply outgrew the procedures and system we had.”

In 2002, the bank implemented CODA e-Finance, chosen because it could handle its complex financial requirements. As a result, HVB was able to define a chart of accounts that would make multidimensional analysis and consolidation an automated formal process. Now, with all of the HVB companies using the same system all the numbers can be run at the same time and information is available daily allowing controllers more time for analysis. Because all entries are traceable back to their origin, it also gives them greater confidence in the accuracy of the numbers.

“I think HVB pushed the envelope on the system,” says Valente. “While other clients may have a lot of one characteristic or another we had multiple variables in every type of characteristic, a lot of entities, currencies, transactions and profit centers, as well as a big balance sheet and foreign exchange revaluation. We basically used all of the core CODA functionality.”