Risk & Compliance

Compliance Creep

Monthly closes are taking longer, thanks to increases in compliance demands and an internal focus on reliability.
Lori CalabroJuly 6, 2004

It used to be that shorter monthly closes were considered a best practice. But these days, shorter is relative.

Thanks to increases in compliance demands and an internal focus on reliability, closes are actually getting longer. New data from The Hackett Group’s 2004 “Finance Book of Numbers,” in fact, shows that close times for median firms increased from 5.2 days in 2003 to 5.5 days in 2004. Even “world-class” firms — those that Hackett, a business advisory group, deems high in efficiency and value creation — have seen a 19 percent jump in close times, from 4.3 days in 2003 to 5.1 days in 2004.

“Monthly closes are taking longer, and they will continue to lengthen,” says Richard T. Roth, Hackett’s chief research officer. In fact, by year-end, Hackett estimates, closes will take almost six days. “Much of the problem,” says Roth, is that “the pressure on CFOs for data and disclosure is worse, not better,” both internally and externally.

What’s happening, however, “might just be a bubble,” says Steven M. Bragg, CFO of Premier Data Services and author of Just-in-Time Accounting (John Wiley & Sons, 2001). Because of the Sarbanes-Oxley Act of 2002, “companies are forecasting numbers to meet the Section 404 requirements,” and that is adding to the process. What they’re trying to avoid, he adds, “is having to run a fire drill if there is some control breakdown.”

But how do longer closes mesh with new Securities and Exchange Commission rules to produce timelier financial reports? “Companies are being extraordinarily careful” with their numbers, and making up time on the back end, says Robert D. Kugel, a vice president at Ventana Research.

Kugel, however, sees an eventual return to shorter closes as compliance becomes automated. After all, he says, “shorter closes are the manifestation of good process execution, sound process design, and solid control systems.”