Challenges for Today’s Finance Function Balancing Compliance and Performance

A DV I S O RY

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Introduction

Many organizations worldwide are experiencing new challenges as a result of rapidly evolving regulatory mandates, competing business priorities, and the capital markets’ need for transparency in financial reporting information. In addition, organizations’ finance functions are facing new challenges and, in many cases, are evolving from a focus that is largely compliance- and accounting-based to one that also encompasses operations and performance issues. For organizations that must comply with them, International Financial Reporting Standards (IFRS), the Sarbanes-Oxley Act of 2002 (S-O), and Basel II—as well as accounting principles and reporting requirements imposed by regional and local regulators—pose numerous challenges and drive varying business priorities. Indeed, such mandates have resulted in a number of persistent challenges for those managing their organizations’ financial infrastructures. These challenges include: • Excessive, perhaps redundant, financial reporting costs • Problems in meeting and expediting reporting deadlines • Limited time for data analysis (due to the amount of time needed for data collection and consolidation) • Differences in content between internal and external reporting, requiring laborintensive reconciliations • Excessive manual “work-arounds” resulting from too few automated processes, which drive concerns about information quality and auditability • Time-consuming processes, which are likely redundant or overlapping • Lack of transparency of financial reporting processes and data • Lack of effective understanding of accounting systems’ capabilities • Need for reliable, timely, meaningful information for corporate transactions These challenges often create “imbalances” between the reporting requirements and the performance objectives at many organizations—in areas including planning, budgeting, and forecasting; reporting to management; and external reporting to legal and regulatory entities as well as to shareholders (see Figure 1). Figure 1: The Performance/Compliance Balance

Performance

Compliance Source: KPMG LLP (U.S.), 2005. © 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Organizations have tended to address each new regulatory requirement or business imperative as separate from other efforts. Time constraints and competing priorities have prompted business leaders to focus much of their attention on the “must do” compliance issues (see Figure 2)—often at the expense of creating an integrated, wellbalanced reporting environment that achieves compliance and also supports overall business goals. Figure 2: Driving Performance While Maintaining Compliance

Compliance Focused

Compliance Biased Performance and Compliance Optimized

S-O 404

Compliance

Basel

Today Performance Biased

IFRS

Performance Focused

Late 1990s

Performance

Source: KPMG LLP (U.S.), 2005.

Recent regulations have put compliance squarely on the leadership agenda, although organizations may not always perceive its added value.

If allowed to persist, this imbalance between compliance and performance can result in missed opportunities to deliver sustainable value through an integrated financial reporting function. This tendency may change, however, as organizations increasingly strive to drive business value by achieving a balance between compliance and performance. Recent regulations have put compliance squarely on the leadership agenda, although organizations may not always perceive its added value. However, regulatory mandates can be used as a platform for facilitating change and a renewed focus on performance. This paper is the first in a series of KPMG documents to address challenges to the finance function in today’s environment. It addresses the causes and implications of imbalances between compliance and performance at many organizations today. It considers how the finance function can better align current regulatory compliance initiatives so it can begin to reduce costs, improve the speed and timeliness of reporting, enhance information quality, sustain compliance, and, over time, improve business performance. It sets the stage for this discussion by addressing some methods an organization can use to begin integrating its financial reporting—so that the speed and timeliness of financial reporting are enhanced and compliance supports business improvement.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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The Current Environment

Figure 3: Pressures on the Financial Reporting Infrastructure Globali zati on

O

II

ic os ie n c tC y& u tti ng

el R eg Local u l a ti ons

e titi v Co m pe res u Press

form a n Per ce

Financial Reporting Infrastructure

ing urc so ut

IFR S

sbane Sar xley O

Bas

A.R.C. Morgan European Companies Sarbanes-Oxley Benchmarking Survey September 2004

With regulatory compliance firmly on the leadership agenda, and financial markets expecting increased detail and transparency in reported information, organizations have a new incentive to focus on reporting efforts and to align such efforts with performance improvement.

mpliance Co

“A large number of companies have found it increasingly difficult to balance the Sarbanes-Oxley compliance efforts with IFRS and local government requirements.”

f Ef C

Source: KPMG LLP (U.S.), 2005.

The need to comply with numerous concurrent regulatory mandates is driving new reporting issues and causing many organizations to experience persistent challenges in managing their financial reporting infrastructures (see Figure 3). Excessive costs, problems in meeting deadlines, manual work-arounds, and lack of data transparency have been among the results. At the same time, continuing business demands put pressure on an organization’s ability to perform effectively. Globalization is resulting in increasingly complex organizational structures and business relationships. Efforts to improve efficiency, in part due to rising compliance costs, are resulting in efforts to centralize or outsource various functions— thereby shifting labor costs. Competitive pressures exacerbate these challenges.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Figure 4 illustrates some of the reporting challenges faced by large multinationals with complex group structures, differing information systems, and country-specific legislation. Figure 4: Multinational Bank with Complex Reporting Environment

GLOBAL HEADQUARTERS

GAAP Reporting

U.S. GAAP

Regulatory Reporting

U.S.-SEC reporting Sarbanes-Oxley (S-O)

IFRS

Basel II Tax reporting

Multinational Bank Head Office

UNITED KINGDOM

Joint Venture Entity

Subsidiary A

Integrated ERP system

GAAP Reporting

GAAP Reporting

IFRS U.S. GAAP reconciliation

Management Shareholder value reporting Reporting Consolidated management reporting Product/service reporting

Budgets and Forecasts

Strategic plans

Corporate Finance

Stock transactions

Annual budget Rolling forecast Closing preview forecast

Financing transactions

GERMANY

AUSTRALIA

UNITED STATES

Subsidiary B

Subsidiary C

Associate

Integrated ERP and outsourced source systems

2nd Tier and specialist source

Subsidiary B,1

In-house developed system

Integrated Enterprise Resource Planning (ERP) system and specialist source systems

Subsidiary B,2

Integrated ERP system

Legacy systems

GAAP Reporting

GAAP Reporting

GAAP Reporting

GAAP Reporting

GAAP Reporting

IFRS U.S GAAP reconciliation

IFRS German GAAP U.S. GAAP reconciliation

IFRS German GAAP

IFRS German GAAP U.S. GAAP reconciliation

IFRS U.S. GAAP reconciliation

IFRS U.S. GAAP reconciliation

Regulatory Reporting

Regulatory Reporting

Regulatory Reporting

Regulatory Reporting

Regulatory Reporting

Regulatory Reporting

Regulatory Reporting

S-O Basel II Tax reporting

S-O Basel II Tax reporting

S-O Basel II

S-O Basel II Tax reporting

S-O Basel II

S-O Basel II ASX Corporate Governance Tax reporting

S-O Basel II Tax reporting

Management Reporting

Management Reporting

Management Reporting

Management Reporting

Management Reporting

Management Reporting

BU reporting Product/service reporting

BU reporting Product/service reporting

BU reporting Product/service reporting

BU reporting Product/service reporting

BU reporting Product/service reporting

BU reporting Product/service reporting

In-house developed system

Budgets and Forecasts

Budgets and Forecasts

Budgets and Forecasts

Budgets and Forecasts

Budgets and Forecasts

Budgets and Forecasts

Annual budget Rolling forecast Closing preview forecast

Annual budget Rolling forecast Closing preview forecast

Annual budget Rolling forecast Closing preview forecast

Annual budget Rolling forecast Closing preview forecast

Annual budget Rolling forecast Closing preview forecast

Annual budget Rolling forecast Closing preview forecast

Corporate Finance Joint venture reporting

Source: KPMG LLP (U.S.), 2005.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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The need to comply with numerous concurrent regulatory mandates can have a number of significant implications for an organization seeking to balance compliance with efforts to drive improved organizational performance. These implications can include: Cost. High costs of addressing increasing complexity and volume of rules and regulations, due to: • Process inefficiencies from multiple reporting processes/systems to accommodate increasing reporting requirements • Manual work-arounds for legacy systems that have difficulty handling new reporting requirements • Inefficient use of people resources Speed. Difficulty in meeting reporting deadlines, due to:

Source: KPMG LLP (U.S.), 2005.

• Legacy systems that have difficulty handling new reporting requirements, thereby increasing the time needed to produce reports • Lack of the right knowledge and skills to execute quickly • Lack of training, so staff need more time to do their work • Challenges in leveraging technology to better enable compliance Quality. Reduced quality of reporting, due to: • Differences between internal and external reporting streams and outputs • Errors from manual work-arounds • Difficulties in applying complex rules • Lack of the right staff with the right skills and competencies to understand and interpret evolving reporting and compliance requirements To address these challenges, and the opportunities they present, financial leaders need to assess their finance functions so they can begin to determine how to improve the balance of compliance and performance. An important aspect of this assessment is an analysis of the relationship between the finance function and the organization overall, as discussed in the next section.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

Financial leaders need to assess their finance functions so they can begin to determine how to improve the balance of compliance and performance.

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The Changing Role of the CFO And the Finance Function

As the role of the CFO has evolved in recent years beyond the accounting/compliance realm and into that of strategy and operations, the finance function has become a more significant factor in business operations and performance. As a result, the CFO and the finance function are expected to spend more time on value-driving activities versus transaction-processing activities (see Figure 5). Figure 5: A Shift in Focus for the Finance Function Current

To Be Business Support/Partnering

Valuedriving tasks

Transactionprocessing tasks

Process Redesign

Value-Added/ Integrated Systems

Valuedriving up tasks Transactionprocessing down tasks

Source: KPMG LLP (U.S.), 2005.

What’s more, how an organization is organized, structured, and run—that is, what business model it uses—has significant implications for its finance function as well as its ability to evolve as expected. Organizations worldwide use a variety of business models, which influence how their finance functions are governed and organized, what services they provide, the nature of their financial reporting, the people and skill sets they need, and the risk approaches they use. Organizational business models can influence the extent to which the finance function can evolve and thereby drive efforts to balance compliance and performance. For example, in a highly integrated group with strong centralized management, the finance function generally has an enhanced ability to drive organizational change. By contrast, a finance function in a financial holding group, with legal entities operating with a high degree of independence, may face greater challenges in addressing imbalances organization-wide. Once leaders understand the relationship between the finance function and the organization overall, they can begin to consider how they should evolve the finance function to address imbalances between compliance and performance. The first step is to identify the objectives and the scope of the intended change. As shown in Figure 6, the finance function may move through a number of stages depending on the organization’s objectives and the scope of the planned change.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Figure 6: The Integration of the Finance Function and the Business

Objectives of change

Transform

Redesign/ Standardize

Streamline

Single

Multiple

Group-wide

(functions, reporting entities, and reporting types)

Integration levels

Source: KPMG LLP (U.S.), 2005.

This process can enable the finance function to respond to change and begin to take on a new leadership role in the organization. As it moves through the stages, the finance function would begin to spend less time on transaction-processing activities and more time on value-driving activities. Many finance functions today provide a wide range of services to the organization. These services can include the different types of financial reporting, including budgeting and forecasting, management reporting, GAAP reporting, regulatory reporting, and corporate finance reporting. These services can also include financial closing and consolidation, accounts receivable and collections, accounts payable and vendor management, fixed asset accounting, travel and expense processing, employee payroll and benefits, tax compliance and planning, treasury and cash management, and financial risk management, among other important activities. Changing regulations have put the financial reporting aspect of the finance function in the spotlight in many organizations. The next section focuses on how the challenges in implementing complex regulations have affected the financial reporting infrastructure, thereby contributing to the imbalances between compliance and performance.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

Changing regulations have put the financial reporting aspect of the finance function in the spotlight in many organizations.

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The Complexities of Finance Integration

Budgets and Forecasts can include: • Annual budget • Rolling forecast • Operational forecast • Strategic plans • Closing preview forecast Management Reporting can include: • Shareholder value reporting • Business unit reporting • Product/service reporting • Transfer pricing • Cost accounting

Complex new regulations, and challenges in implementing them, have helped to drive imbalances at many organizations. The number of financial reports that often must be generated organization-wide exacerbate these imbalances. Financial reporting outputs and the data flows that produce them can be multi-layered and complex. Figure 7 represents a high-level view of the basic building blocks of financial reporting, at both the group and reporting-unit levels. Figure 7: Financial Reporting Building Blocks and Outputs

Budgets and Forecasts

Management Reporting

GAAP Reporting can include: • IFRS • U.S. GAAP • Stand-alone statutory reporting per local GAAP

GAAP Reporting

Regulatory Reporting

Corporate Finance

Guidelines and Policies Processes and Controls Management Information Systems

Regulatory Reporting can include: • Tax reporting • Regulatory reporting (i.e., Basel)

Source Systems (ERP) Chart of Accounts Data

Corporate Finance can include: • Stock transactions • Financing transactions • Mergers and acquisitions Budgets and Forecasts

Management Reporting

GAAP Reporting

Regulatory Reporting

Corporate Finance

Budgets and Forecasts

Management Reporting

GAAP Reporting

Regulatory Reporting

Guidelines and Policies

Guidelines and Policies

Processes and Controls

Processes and Controls

Management Information Systems

Management Information Systems

Source Systems (ERP)

Source Systems (ERP)

Chart of Accounts

Chart of Accounts

Data

Data

Corporate Finance

Source: KPMG LLP (U.S.), 2005.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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As finance functions cope with increasingly complex rules and regulations, they may end up with different bases for accounting and reporting as well as different processes and systems to produce reporting outputs. For example, an organization may be subject to one basis of accounting for external reporting (i.e., IFRS), another for legal or statutory reporting, and a third for internal management reporting (generally the basis on which the business is managed and against which employees are evaluated). In addition, planning and forecasting are sometimes performed using yet another accounting basis. Significant time pressures and resource constraints augment these problems. Often organizations must cope with the limitations of legacy information systems, among other challenges. As a result, financial reporting processes to address the new reporting requirements may evolve on an ad-hoc basis, often resulting in multiple (sometimes redundant) processes and manual work-arounds developed to bridge gaps in system capabilities or to accommodate time constraints.

Understanding the “Building Blocks” An understanding of the issues underlying these circumstances begins with an analysis of (1) the “building blocks” of financial reporting and (2) how regulatory changes can affect accounting and reporting. As outlined in the table on page 10, regulatory change can affect financial reporting processes in numerous ways, from the initiation of transactions through the generation of financial reports.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Building Blocks

Potential Impacts from Regulatory Change

Potential Actions to Address Impacts

Potential Benefits for Compliance and Performance

Guidelines and Policies

Guidelines and policies are often outof-date due to changes in rules and regulations, organizations, or systems.

Revisions and updates will generally be needed to help staff understand rules and regulations and how they are implemented throughout organizations.

Up-to-date and well-communicated guidelines and policies can enable people to work more efficiently and effectively as well as deliver consistent results organization-wide.

Processes and Controls

Processes and controls may be outof-date due to changes in regulations and systems.

Automated controls—such as balancing control activities, predefined data listings, data reasonableness tests, and logic tests—often are embedded within software programs to prevent or detect unauthorized transactions.

Implementing automated controls can help reduce costs, better manage risk, and provide more predictive business insights. Process standardization can help ensure common standards for comparable reporting.

Management Information Systems

Fragmented information systems with multiple manual interfaces have evolved at many organizations. Systems often lack standardized configuration and controls to support data quality and speed of reporting.

Existing systems—particularly the larger Enterprise Resource Planning (ERP) systems and high-end general ledger packages—may have built-in capabilities to accommodate specific accounting and reporting changes. Needed changes may include reconfiguration of existing software to enable new reporting requirements.

Standardizing information systems and related systems controls can help eliminate manual processing errors, reduce costs, and improve reporting timeliness.

Spreadsheets and models used by management as an integral part of the financial reporting process should be considered in a review of required systems modifications.

Source Systems

Legacy systems often require the need for significant interfaces, including spreadsheets and models.

Interfaces may need to be changed or developed to align with the introduction of new source systems and the decommissioning of old systems. Changes in existing mapping tables to the financial system may also be needed.

Elimination of interfaces can result in faster data flow and reduced error risk.

Chart of Accounts

Multiple charts of accounts can evolve (at different levels of the organization and to fulfill different reporting requirements) as a result of factors including organizational structure.

Changes to charts of accounts will usually be needed due to reclassifications and additional reporting criteria. Necessary changes can include creation of new accounts, extensions in the alphanumerical code used, and deletion of accounts that are no longer required.

Standardizing charts of accounts can help reduce manual intervention in the financial reporting process.

Data

Inconsistencies, inefficiencies, and errors can result when data is derived from multiple sources and is repeatedly re-entered—circumstances that arise due to different reporting requirements and the ways in which reporting has been implemented through systems and processes.

New financial reporting requirements may result in: • Increasingly detailed presentation of information • New data elements or fields to be recorded • Information to be calculated on a different basis

Aligning master data requirements for multiple types of financial reporting can result in reduced errors and faster data flow, thereby helping to improve reporting cycle times.

Changes may be needed to allow for the capture of new or changed data.

Source: KPMG LLP (U.S.), 2005.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Making the Change

Organizations have differing structures, systems, and industry-specific circumstances, which prevents a one-size-fits-all approach to finance integration. In addition to strategic decisions concerning, for example, modifications to existing systems or the purchase or development of new systems, management will need to consider tactical issues, including: • The most appropriate method to harmonize internal and external reporting • Whether changes are made at the group, company, or the source-system levels • How to deal with dual-reporting requirements • How to deal with the cut-over approach from a general ledger under one GAAP to a general ledger under another GAAP • How to manage the risks of model-driven solutions

Systems, Processes, and People Addressing these issues early in the integration project life cycle can help enable leaders to better address the impacts to systems, processes, and people as well as limit unnecessary costs resulting from duplication of effort or changes in approach at a later stage. Needed efforts will vary according to: • Organization size • Industry • Level of finance integration within each country • Existing information-systems preparedness for finance integration Consideration needs to be given to: • The purchase or development of new systems or modification of existing systems • Modification of processes and controls • Updates to guidelines and policies • Vendor maintenance and ongoing support • Ensuring that people with the right skills are in place • Training needs • Project management • Whether to implement a short-term solution to meet tight deadlines as well as a more robust long-term solution to the same problem The strategic and tactical decisions relating to finance integration should be conducted within the organization’s governance framework to closely align any significant changes with the organization’s strategic business goals.

Determining Where to Initiate the Change Changes to the financial reporting infrastructure such as those discussed above can be made at different levels in an organization’s financial reporting process—at, for example, the group level, the company level, or at the source level (see table on page 12).

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Figure 8: Integration Levels Integration at Group Level Group Consolidation System Group Financial Reporting Adjustments

Adjustments Local GAAP Group Financial Reporting

Group Level Individual entities prepare financial reporting based on local GAAP. This financial reporting is converted to another GAAP, such as IFRS or U.S. GAAP, during the group consolidation process. Organization Suitability

Country A

Country B

Entity I using system x

Entity II using system y

Entity III using system z

Local GAAP financial reporting

Local GAAP financial reporting

Local GAAP financial reporting

• Individual entities in certain countries do not have to report separately • Only a few simple adjustments are required and are made top-level during the consolidation • Information to make conversion adjustments is readily available Reporting-Unit Level Individual entities prepare financial reporting based on local GAAP and then convert that information to another GAAP, such as IFRS or U.S. GAAP, before sending the reporting to the group level for consolidation.

Integration at Reporting-Unit Level Group Consolidation System Group Financial Reporting

Country A

Country B

Entity I using system x

Entity II using system y

Entity III using system z

GAAP financial reporting

GAAP financial reporting

GAAP financial reporting

Local financial reporting

Local financial reporting

Local financial reporting

Organization Suitability • Individual entities in each country are required to report separately • Group structures are complex • Consolidated entities are numerous • All required source data is readily available

Integration at Source Level Group Consolidation System Group Financial Reporting

Source Level Individual entities make changes to source systems to enable GAAP accounting and reporting, such as U.S. GAAP or IFRS, from source systems. Organization Suitability

Country A

Country B

Entity I using system x

Entity II using system y

GAAP financial reporting

GAAP financial reporting

Accounting at source

Accounting at source

• Daily financial statements are required • Complex calculations affected by reporting requirements are performed at the source • Capturing new data requires changes at the source • More practical when source systems and the general ledger are fully integrated

Source: KPMG LLP (U.S.), 2005.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Conclusion

Organizations will increasingly strive to drive business value by achieving a balance between compliance and performance. Increasingly, many leaders will find that regulatory mandates can be used as a platform for facilitating change as well as a renewed focus on performance. Organizations should seek to maintain the momentum they achieved during GAAP conversions and other reporting initiatives and aim for improved alignment among such initiatives (sharing scarce resources in the IT and finance departments).

Compliance

Source: KPMG LLP (U.S.), 2005.

Performance

Closing the gap between compliance and performance can help reduce costs and facilitate a transition to a single platform for all financial reporting needs. An integrated, well-balanced reporting environment that achieves compliance and also supports overall business goals is a result that would help drive value for all stakeholders.

Key Questions Balancing compliance with performance through finance integration should encompass four dimensions—accounting and reporting, systems and processes, people, and business impacts. A number of important questions can help leaders address these dimensions: Accounting and Reporting • Is our organization able to sustain compliance with changing regulations? • Do we meet reporting deadlines on a timely basis? • To what degree do we produce high quality, accurate reporting? • Are our stakeholders able to understand our organization and performance based on our reporting? Systems and Processes • How can we standardize and simplify our systems and processes? • How can we improve our degree of automation? • Do we have a group-wide chart of accounts? • Are data sources consistent for multiple types of reporting? • Can we use shared services to improve aspects of our finance function? People • Do we have the right staffing levels? • Do we have the right people with the right skills to address complex accounting and reporting requirements? • To what degree does our finance staff have an in-depth knowledge of the business? Business • How can we create better and faster management information? • How can we better align our management incentives with our external reporting?

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Appendix I: Compliance Initiatives— Pressures on the Financial Reporting Structure The need to comply with numerous concurrent regulatory mandates is driving new reporting issues and causing many organizations to experience persistent challenges in managing their financial reporting infrastructures. Issues specific to certain regulatory initiatives are outlined below:

IFRS Conversion to the International Financial Reporting Standards (IFRS) poses a significant challenge for organizations globally, due to: • Complexities in the technical accounting standards themselves and difficulties in converting systems and processes to accommodate these complexities • Domiciles of organizations • Reconciling IFRS reporting with local and international regulatory considerations • The extent of differing information systems within an organization • A lack of skilled programmers and IFRS professionals IFRS conversion projects are often viewed as finance-specific projects rather than business initiatives. However, these projects also affect information systems and human resources as well as associated supporting processes and functions. In some situations, IFRS conversion projects can fundamentally change the way some business units operate.

U.S. GAAP Companies that are listed on a U.S. stock exchange are currently required to produce for submission to the Securities and Exchange Commission (SEC) a reconciliation between their local reporting standards and U.S. GAAP. When reporting for IFRS, for example, these countries will be required to amend this reconciliation of local GAAP to U.S. GAAP to become one that reconciles IFRS and U.S. GAAP. These organizations’ information systems must be able to record or generate information at an appropriate level to allow this change in reconciliation.

Basel II The Basel II Accord is an evolving regulation relating to the capital adequacy of internationally active banks. Basel II has different objectives than GAAP reporting, although their frameworks share some characteristics. As a result, organizations will have substantial overlaps in data and reporting requirements. Systems and processes should have the capability to cope with the demands of these differing reporting types while helping to eliminate duplicate work.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Sarbanes-Oxley (S-O) and Other Corporate Governance Legislation Many countries may be affected by corporate governance legislation, which often requires management to develop a sound system of internal controls around financial reporting. For example, section 404 of the Sarbanes-Oxley Act of 2002 requires management to document and assess internal controls over financial reporting, report on the assessment, and subject the assessment to audit by the organization’s independent auditor. Significant changes in financial reporting, such as implementation of new accounting standards, may negatively affect a significant proportion of the internal controls over financial reporting due to: • Excessive use of uncontrolled enduser models (e.g., spreadsheets) • Extensive changes to systems and processes, potentially disrupting existing controls • Manual work-arounds, increasing risk of error • Lack of available skilled resources

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Appendix II: Case Studies

The case studies below help illuminate how the finance functions at a variety of organizations have sought to balance compliance with performance. Case I: Harmonization of External Reporting and Management Reporting A large multinational organization faced significant differences between external reporting and management reporting, after having implemented parallel processes and system work-arounds in the course of its conversion to IFRS. Especially: • Where mappings have changed from the source system to the general ledger, mappings to the management reporting systems and the data warehouse were changed • Alterations to calculations and the addition of new data in source systems, as well as new timing of data feeds, affected key ratios and percentages in internal reports • Where the primary accounting principle for internal and external reporting differed, complex reconciliations were required to align them Thus, the organization sought to realign external and management reporting, using the same or a similar basis and no manual work-arounds. This basis should also be used for the organization´s value-based management systems. Approach The organization took the following path to integrated reporting: • Integrated closing process: comprehensive analysis of existing internal and external financial reporting processes as well as an assessment of opportunities to integrate those processes • Group-wide reporting requirements: definition of details of the new reporting structure, including analysis of reporting outputs and the necessary line items for each reporting output • Master data harmonization: definition of group consolidation structure and level of detail needed for each financial reporting line item; harmonization of charts of accounts; definition of which key performance indicators should be used and how to calculate them • Optimization of systems and processes: this complex task included establishing significant interfaces between finance and information systems’ functions across the entities and segments • Guidelines and training: updating guidelines and training of finance personnel in the implementation and maintenance of changes to the reporting processes Results The organization enhanced its reporting speed through significant reduction of parallel processes. Moreover, it realized efficiency gains through more effective use of financial personnel, so that reconciliation work can be replaced by in-depth analysis of results. Finally, the organization improved the quality of its closing information, as reported data can be used both for internal and external purposes.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Case II: Reducing Costs While Maintaining Reporting Quality A European conglomerate was faced with reinventing its finance function, which was distributed over a range of business units. It sought to achieve the following:

• Improve overall cost efficiency and ensure efficient use of resources • Enable consistent enterprise control by ensuring common management reporting and evaluation standards

• Ensure consistent GAAP reporting for statutory consolidation Approach The organization took a “shared services approach” to integrating its finance organization and processes and systems. To do so, the organization:

• Identified a range of finance shared services scenarios, evaluated their costs and benefits, and determined how to implement shared services

• Developed a detailed project plan for integrating financial reporting as well as finance systems and processes while implementing a common finance organizational structure

• Adopted common financial reporting standards based on GAAP and management consolidation requirements

• Defined roles and responsibilities within the finance shared services processes as well as within preliminary and downstream processes

• Developed process definitions for finance shared services, taking into account IFRS, local GAAP, and management reporting requirements

• Executed a program to bring the existing SAP ERP systems in line with the finance processes and implemented interfaces to common reporting systems as well as a common chart of accounts

• Took steps to manage the change to organizational structures, processes, and systems Results The organization achieved efficiency gains of about 25 percent in the finance function while helping to ensure consistent compliance with IFRS, local GAAP, and management reporting requirements through common processes and standards. It benefited from an integrated approach to addressing organization and processes as well as IT systems in the context of legal and management requirements.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Case III: Enhancing the Organization’s Ability to Respond to Volatility of Results Through Improved Budgeting and Forecasting Processes A financial services organization was confronted with increased volatility in its results as a result of internal and external factors. The introduction of IFRS fair value methods had increased this pressure and widened the gap between external regulatory reporting and internal management reporting. To address these pressures, the organization sought to achieve the following:

• Establish an enhanced budgeting and forecasting reporting process with both financial and non-financial elements

• Generate reporting that is lower cost, more timely, and compliant with regulatory requirements Approach The organization took the following steps:

• Determined the requirements, information needs, and expectations of the enhanced budgeting and forecasting reporting process

• Developed a blueprint of the enhanced budgeting and forecasting process • Developed process definitions, taking into consideration external reporting (IFRS/ U.S. GAAP), local GAAP, and management reporting requirements

• Devised system blueprints for the required systems adaptations (which included evolving from multiple charts of accounts to one standard chart of accounts, embedding manual work-arounds, and moving from multiple data sources to single data sources and automated flow-through). These blueprints took advantage of new, innovative techniques designed to produce more reliable prospective performance information, including impairment testing to identify and incorporate decreases in value of major business assets, sensitivity analyses intended to support management in controlling fluctuations in future cash flows, and hedge and economic value-added models to determine actual value of assets.

• Defined new roles and responsibilities within the new process • Redefined the skills and competencies needed within the finance function Results As a result of implementing improvements to the budgeting and forecasting processes, the organization achieved the following benefits:

• Enhanced ability to respond within a changing environment (credit institutions, business analysts, shareholders, and other stakeholders)

• More timely production of budgets and forecasts • Improved quality of data • Improved compliance with regulatory requirements • Increased efficiencies and reduced costs

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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Case IV: Financial Integration to Facilitate an Acquisition A large multinational company sought to acquire an owner-managed business (which was not subject to mandatory conversion to IFRS and thus was using local country GAAP). Due diligence efforts revealed that to complete the acquisition decision process in a timely manner, the company needed first to assess the impact of various aspects of converting the target’s financial information into IFRS and U.S. GAAP and of applying purchase accounting. Following the acquisition, the target’s financial reporting would need to be integrated based on the acquirer’s GAAP and management accounting. Approach The acquiring organization took the following steps to address challenges within the target:

• Valued the target’s intangible assets—including trademarks, customer lists, and technology—and made assumptions about the future of those assets to determine whether they must be amortized

• Conducted a high-level impact analysis of GAAP conversion and purchase price allocation

• Converted the financial statements to both IFRS and U.S. GAAP • Modified the target’s existing systems and reports to mesh with its own needs

• Created internal and external reports for forecasting/planning suitable for integration in the acquiring company’s forecasts and budgets

• Addressed issues of corporate governance and risk management • Implemented controlling reports and developed forecasts in accordance with the acquirer’s management reporting Results The target was able to meet reporting deadlines to enable the acquirer to comply with internal and regulatory reporting requirements.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

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KPMG Contributors Manfred Hannich, KPMG in Germany Alexander Riedel, KPMG in Germany Martijn van Wensveen, KPMG in the Netherlands Egidio Zarrella, KPMG in Australia Simon Martin, KPMG in Australia Jochen Pampel, KPMG in Germany Colleen Drummond, KPMG LLP in the United States Diane Nardin, KPMG LLP in the United States Carole Law, KPMG LLP in the United States

The views and opinions are of those interviewed and do not necessarily represent the views and opinions of KPMG member firms. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied, or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever, or vice versa. © 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved. Printed in the United Kingdom. 28043Aatl KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved.