In the current age, businesses are organized and managed in segments such as regions, business lines, and even brands. This shifts the management’s focus from the separate legal entity’s performance to the segment results for management analysis and consolidated results for the market. Yet, while reporting to the local authorities, corporations need to provide their financial statements (“FS”) in the country’s local GAAP.
Each country has its own set of statutes that mandate the submission of periodic FS of separate legal entities to local regulatory authorities and mandate their audits. Oftentimes, Local Statutory Reporting (“LSR”) and management reporting differ widely in costs, judgements, and materiality. Compliance with local statutes is critical as any failure to meet the obligations could lead to considerable penalties under applicable laws and could become a topic for boardroom discussions.
LSR is a significant activity that influences local compliance, taxes, dividend decisions, etc. and consumes a substantial amount of an entity’s time, cost, and effort, thus attracting significant attention from investors, auditors, regulators, banks, and other key stakeholders.
Challenges in the traditional reporting model:
The preparation of local reports has traditionally been challenging. Accurately reporting information has become more challenging, as corporations continue to grow complex in an environment bursting with innovative technologies, regulatory changes, globalization, and having grown through mergers. Organizations preparing FS in a decentralized, manual process face challenges such as
– dependency on individuals,
– attrition,
– additional preparation /review time due to lack of coordination between different teams,
– lack of alignment and documentation around policies, processes, roles, responsibilities and
– inconsistencies in applying GAAP.
Drivers to effective and efficient LSR
Corporations need qualified accountants who specialize in local GAAP, disclosures, and compliances to mitigate these challenges and effectively manage their local reporting which is often ignored as the management decisions are taken at the group/ segment level.
People, processes, data, and technology are the key drivers of effective and efficient reporting. With connected, standardized, and automated processes, organizations can benefit from
- Centralization of audit support,
- Reduced costs through economies of scale,
- Centralization and efficient utilization of talent,
- Integration of LSR with management and tax reporting,
- Better governance, improved transparency, and compliance,
- Continuous improvement and innovation.
Corporations have thus streamlined their reporting through transformation, automation, and other cost optimizing measures like Finance Center of Excellence (“CoE”) and outsourcing.
Finance Coe: Finance is the top business function adopting the GCC operating model, followed by HR and IT. Many corporations have already centralized recording of transactions through Shared Service Centers. Hence, it is only rational to extend the merits to reporting and analysis. Organizations have moved beyond traditional back-office processes such as O2C, P2P, H2R, etc. to include specialized areas like reporting and tax compliance. Over the years, the industry’s mindset has shifted to perceive reporting GCCs not as cost centers but as CoE that provide value.
Outsourcing: Based on the 2021 survey by Deloitte, finance is the second most outsourced activity, only next to IT. More than 65% of the corporations who participated in the survey have successfully included outsourcers in their GCC operating model. Corporations find outsourcing lucrative and cost-effective, as it could
- access qualified professionals with finance and accounting expertise,
- gain flexibility and the ability to scale up/down depending upon need.
Current priorities
Oftentimes, a detailed assessment of the organization’s current LSR process is required to understand the challenges and identify areas for improvement. To successfully adopt a finance COE and achieve its LSR objectives, organizations prioritize one or more of the following, based on their strategic objectives.
- Establishment of COE and centralization of functions like FP&A, LSR, and audit,
- Process optimization
- Design and implementation of strong internal controls over financial reporting,
- Identification of skilled resources and monitoring of their KPIs,
- Identification, implementation, and operation of technology solutions for automation,
- Regulatory updates
- Project management.
Technology
Technology can help automate various levels of reporting, such as FS preparation, notes and disclosures, board reports, and annual reports. Such tools have in-built capabilities for inter-company reconciliations and audit trails. Quick consolidation, robust security, cloud access, and multi-GAAP capabilities are a few of the essential features of FS automation tools.
Automation tools can help corporations with timely reporting, review and monitoring activities, track accountability, reduce compliance risks, improve efficiency, increase regulatory compliance, prepare businesses for audits, reduce the turnaround time, and are user-friendly and cost-effective.
Reimagining the future of LSR
Organizations are evolving continuously and adapting effectively to rapidly changing geopolitical conditions like COVID-19 and Brexit through transformation. The COVID-19 pandemic and resultant ‘new normal’ is compelling corporations to tweak their LSR operating models. Based on the survey conducted by Deloitte in 2021, many Corporations plan to increase traction in reporting and analytics. It is also expected that automation will remain a priority over the coming years. Corporations are expected to adapt to the COVID-19 impact and shift their operating model to be remote and virtual by incorporating flexibility and well-being practices.
Authored by
Madhu Sudan Kankani, Partner, Deloitte Touche Tohmatsu Limited, India
Sainithya R, Deputy Manager, Deloitte Touche Tohmatsu Limited, India
