The Order to Cash and Procurement to Pay processes convert orders into goods and services. The Record to Report (R2R) process converts those activities into reports to support Financial Planning and Analysis (MI reporting), statutory accounts, and tax filings.
Accounting information systems, processes, and people execute R2R procedures. Corporate structure greatly influences the types of reports needed. In this post, we'll determine the right R2R governance, and in part 2 we'll the individual processes needed.
Each company has a legal status (regulated, unregulated, incorporated) and may have multiple subsidiaries and types within its group. Status determines external reporting standards and tax filings, and size will determines the types of management reports needed. The following components will determine the type of R2R governance needed:
Company registration - What kind of company is it? Is it a sole proprietorship, is it formally registered? Where the company is registered will determine the filings needed and the standards governing them.
Corporate structure - Is it just one company, or are there subsidiaries? Does your company participate in joint ventures? Corporate structure will determine the number of reports needed and how to calculate consolidation.
Company operations - How many departments or businesses does the company have? Each business needs need income and expenditure reports, commitment reports, budget reports across the corporate structure.
The more complex the corporate structure, the more complex R2R is. Larger companies with layers of management will need reports suitable for each manager. R2R processes support the needs of both internal and external report users and should be flexible enough to provide customisation reporting efficiently.
Setting the right policies
Record to report governance policy usually has two components: accounting policy and process governance policy.
Accounting policy is set according to the accounting standards. In the United States standards or set by the Financial Accounting Standards Board. IFRS is governed by the International Accounting Standards Board. Some industries have additional standards to follow, Charities Statement of Recommended Practices for UK regulated charities.
A company's accounting policies must always be sourced from the standards it is required to report against. Multinational companies with subsidiaries or non-regulated entities will be required to apply different accounting policies to stand-alone accounts for the subsidiaries and may be required to prepare a separate group statement. The accounting policies to apply will vary and those applying these standards will be required to be knowledgeable of both.
ERP system governance - master data governance
Every ERP system functions on a basis of master data. Master data is static reference data which is applied to transactions to identify them. For example:
General ledger accounts - General ledger accounts are used to identify the type of transactions. For example: Fixed assets, accounts payable, bad debt. General ledger accounts can also be used for operational purposes, such as inter-company transactions and elimination.
Chart of accounts - How each account is organised will impact the reports. Different decisions need different reports, and by creating multiple charts of accounts companies can more efficiently prepare multiple financial statements.
Budget centres - Budget centres assign transactions to a business and are used to monitor profitability and spend.
System access and use - Are there sufficient separation of duties to reduce operational risks and fraud? The master data governance policies must set responsibility for system use and access.
ERP systems are very complex, and there are experts in the systems themselves who can advise which modules are available; however, those modules are only going to work as well as the decision making behind it. Poor master data, and poor system management will lead to confusing and unhelpful reports leading to delays in decision making and stress on staff.
Part 2 will discuss the individual processes needed in R2R. In large companies, a back office accounting staff should be held responsible for determining system access, master data setup and implementation of accounting policy. In smaller companies an office manager or operations staff can play an accounting role; however, outsourcing report generation is recommended. When designing the process, management must consider staff expertise and complexity of reporting.