Financial Restatements - Now That Hertz!

We recently saw that Hertz corp expanded their restatement beyond 2011 to include 2012 and 2013 as well. This announcement sent the stock price down over 9% in a day, down 22% since the first restatement announcement in June.

Back in August we saw Walgreens stock plummet when the CEO announced they adjusted the forecast by over $1 billion.

Both of these cases had different reasons - accounting errors in the first, failure to take into account rising drug prices in the second - but the outcome and lesson is pretty clear. CFOs and CEOs cannot be wrong when it comes to reporting their financials, either historical or forward looking. This is where I’m sure you are thinking - thanks for that thought leadership Captain Obvious. But as obvious as it sounds, it’s shocking to see the state of where many company’s financial processes are - Still prone to errors and inaccuracies.

How is this possible given the enormous ramifications? I have a couple of observations.

 

Reason 1: The persistent misuse of Excel

Excel is still used as the main system for planning, and often financial consolidation and reporting. We blogged about this a few months back so i won’t rehash the entire argument, but suffice it to say a system based on many, many spreadsheets spread across an organization, that contain crazy complex macros that no one knows how to maintain - is a recipe for disaster.

Even when companies do invest in systems, they often resort to Excel to augment features lacking in the systems they bought. Which leads to….

Reason 2: Financial System Frankensteins
Company’s tend to take a piecemeal approach with financial systems. Many systems bought to solve their issues are point solutions - solving only piece of their problem. They then buy another solution (sometimes even from the same vendor) to solve another. And then another...and so on. The problem is these financial processes are quite dependent on each other, so data has to transfer between them. This is sometimes done ‘automatically’ and hidden from the user, but pulling back that curtain is revealing. Many times these solutions were independent products that were purchased by larger vendors, so the underlying technologies are completely different. This means they have their own calculation engines which are maintained separately. The extra effort to make sure the calculations across systems are the same, not to mention the changes made to them, expose an unnecessary and potentially dangerous risk. The same is true when other changes in the organization are made. Do these changes flow seamlessly throughout all the systems? Can you be sure they act exactly the same?

While a fan of horror movies, having a Frankenstein approach to your financial systems and the associated risks are too scary for me…

Reason 3: Taking it over the finish line
Even if all of your systems are working great and your confidence is high, you may be exposed where many companies fall - in the “last mile of finance”. This is where you prepare all the financials, operational information and the associated narrative, and prepare your internal and external reports. This is truly where the rubber hits the road - and arguably where you are now most exposed. These reports come in all shapes and sizes - regulatory reports for the government (i.e. 10Q, 10K), internal management reports, press releases, annual reports, board reports, etc.

The process today is usually a collection of data from various sources (ERP, HR, CRM, CPM), put into Excel spreadsheets, which then get transposed to Word, PowerPoint, InDesign or some other publishing tool to produce the final product. This process often takes weeks to do, and is filled with the potential for errors. If a change is made to one of the underlying systems, how does it flow up? If the change made a material difference, how does the accompanying narrative change? There are solutions for this, like Tagetik’s own CDM, but many companies are not aware they exist and continue on this dangerous road.

These are the big three that come to mind for me, although I’m certain there are many others.  There are solutions out there, like Tagetik, that solve many of these issues and greatly mitigate these risks. But these solutions can only help if the understanding of these risks is top of mind, and someone in these companies want to do something about it and they know what to do about it.  They can create the accountability, visibility, and controls that will prevent many common causes of restatement.

What are your thoughts? Do you agree with these reasons? Any others come to mind?

 

Tagetik CPM Software

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