Companies face increasing demands to produce timely and accurate financial reporting. Management, regulators and investors demand better information faster, which adds pressure to already compressed timelines for closing the books. One obstacle standing in the path of financial close-process efficiency and effectiveness is the volume and complexity of manual journal entries (MJEs).

For many companies, hundreds – sometimes thousands – of MJEs are being prepared, entered, reviewed and approved each month. The protracted process of manually entering and reviewing entries gives rise to process inefficiencies at multiple stages of the financial close. The issue further impacts the close process by taking time away from the value-added analysis that most finance organizations depend upon when making critical decisions.

While there will always be a need for MJEs in the close process, opportunities for improvement can be found in reducing the volume of entries, increasing standardization and automating certain types of transactions. Overcoming these challenges will allow finance to spend more time focusing on analytical aspects of the close process.

Associated Risks
Reliance on manual procedures for preparation and review of journal entries (JEs) can compromise both the integrity and validity of the financial results associated with those entries. Further, manual processes can impact the timeliness of the close process, allowing management less time for review prior to regulatory filings as well as the following:

1. Manual Processes Are Prone to Error – A high volume of MJEs increases the risk of error due to the manual entering of transactions into the ledger by the preparer. Further, reliance on spreadsheets for critical entries carries additional risk.
2. Quality of Review – Organizations with a high volume of MJEs often have a small number of approvers required to review these entries in very short time windows. This can lead to a less than meaningful review process, because the approver is unable to spend an adequate amount of time reviewing MJEs and their supporting documentation.
3. Opportunity for Fraud – Further emphasizing the above point, if the company’s ability to understand, review and control MJEs is constrained, there exists an increased opportunity for fraud, and/or the financial statements may not be in line with management’s intentions.
4. Impact on Related Process Efficiency – The volume and timing of MJEs can adversely impact other financial close processes, such as account reconciliations. Last minute, late or inaccurate entries typically result in inefficiencies and time lost during the reconciliation process.
5. Audit Efficiency – High volumes of MJEs generally correlate with increased costs due to external auditor and internal Sarbanes-Oxley (SOX) testing requirements. Manual transactions typically take more time to test than automated routines.

Additionally, the supporting documentation that is typically located in spreadsheets supporting the MJE has to be further reviewed for testing and compliance purposes.

Common Challenges and the Root Causes
Companies with large volumes of MJEs face similar challenges:

1. Excess Precision – The level of precision that is applied in recording entries can significantly increase the amount of time required to close the books. Many companies continue to record entries for very small dollar amounts, even when they relate to corrections of errors or reclassifications between accounts or departments.
2. Rapid Growth – High-growth companies often utilize spreadsheets and MJEs during their development stage. With rapid and continued growth, the number of spreadsheets and MJEs continues to increase, complicating the process and driving increased inefficiencies.
3. Legal Entity Complexity – The complexity and the lack of integration of multiple legal entities, as well as multiple ERP systems or other financial applications, often lead to increased reliance on MJEs to handle intercompany activity and other accounting entries.
4. Resistance to Change – Key stakeholders at many companies are aware of the opportunities to make improvements within the JE process, but are faced with cultural challenges that represent a significant obstacle to organizational change.
5. Lack of Awareness – Individuals outside the accounting and finance functions may lack awareness of and visibility into the number, complexity and impact of MJEs. Building awareness outside the accounting and finance functions, especially among senior management, can help build the sponsorship necessary to drive an improvement initiative.
6. Changes in Accounting Rules – As companies implement new accounting pronouncements, they often do so through generating the necessary entries in a spreadsheet and then creating the JE in the ledger. Until the ledger is reconfigured to account for the transaction properly, the JE remains manual.

The Role of Enabling Technologies
Current technology can substantially improve the quality and efficiency of the close process by easing the burden created by MJEs. Most financial systems have integrated functionality that allows for the processing of recurring, auto-reversing and other transactions such as allocations, depreciation and amortization that are based on data maintained elsewhere in the system.

Use of these features generally results in a reduced likelihood of errors. In addition, automating JEs can reduce the number of tasks required to close the books each month, allowing finance and accounting personnel to spend more time on financial data analysis.

The challenge we find is that many companies already have the tools with these capabilities, but either have not implemented the functionality, or have not trained their teams appropriately on how to effectively apply the system capability.
 
Key Indicators of Need
Developing an awareness of the challenges created by high volumes of MJEs is an important first step in designing, implementing and sustaining meaningful process changes. The following symptoms may be indicative of improvement opportunities:

1. A relatively high volume of MJEs are prepared each month (e.g., 200 or greater for a midsize company), specifically during the close period.
2. Subledgers are closed between Day 1 to Day 3, but the general ledger close extends to Day 8 or more. The overall close process may be constrained by errors and delays due to the manual effort required to process entries.
3. Entries rely on complex spreadsheets that manipulate data “off-line.”
4. Accounting personnel are logging extensive hours to meet deadlines for financial reporting.
5. Application of technologies that enable automation of MJE-related processes is limited.
6. Comprehensive JE policy or adherence to existing policies, including dollar thresholds related to preparation and review of MJEs, is lacking.
7. Processing of transactions is decentralized, with similar JEs performed at multiple locations.

Getting Started
Leading companies that have been able to reduce the risk and effort associated with processing JEs have focused on process simplification and embraced technology.

Our perspective is that to successfully implement a new JE process, an organization must first understand the current process and policy. Consequently, an effective approach begins with gaining an understanding of the total population of JEs and typically includes the following steps:

1. Develop a cross-functional team of accounting and IT associates who have the knowledge of both the tools and the transactions in order to assess opportunities for automating entries.
2. Obtain several months of JE data, including at least one quarter-end month, to begin trending the population.
3. Analyze JEs by dollar value. Through this type of analysis, we have seen that, on average, 5 to 10 percent of entries are below $1,000. The questions each organization needs to ask are, “How much time is required to generate and validate that entry?” and “Is that level of accuracy worth the effort?”
4. Analyze entries by type and category (e.g., accruals, recurring transactions, allocations, transactions that require calculations). Many of these entries will lend themselves to automation, depending on the specific circumstances for each transaction.
5. Identify entries that can be prepared based on estimates. These JEs often can be made “pre-close” in order to reduce the time spent on transaction processing during the critical close period.
6. Review entries by the preparer and reviewer to determine how the workload is spread among accounting associates.

Investigate the root cause for reclassifications and correction of entries. This may result in process modifications upstream to reduce or eliminate the need for these entries.
 
Lessons Learned
Reducing reliance on MJEs is a critical step to take in designing, implementing and sustaining meaningful enhancements to your financial close process. Keep the following important lessons in mind:

1. Automation of transactions may not resolve all issues with JEs. Companies will also need to look at the root cause for certain entries, such as reclassifications and adjustments, to determine if these entries can be processed correctly on the first attempt.
2. JE policies must be monitored and enforced. It is not sufficient to implement a new policy if no effort is being made to ensure it is being followed.
3. Effective roll-outs of new JE procedures require dedicated project managers from the accounting, finance and IT functions.
4. The scale of the change may lend itself to a focused pilot, followed by a sequenced roll-out plan.
5. Establishing accountability is a critical success factor. Transaction owners must be held responsible for ensuring proper handling of their respective JEs.

Organizations of all sizes can benefit from making the appropriate process and technological enhancements to address concerns about the processing of MJEs. By reducing the effort associated with MJEs, finance can focus on more value-added analytical activities in the close process. Ultimately, finance can focus on the MJEs that really matter and the key stakeholders of the close process will receive better information faster.