Consolidating the Chart of Accounts

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Summary
Master data management (MDM) holds the promise of enabling large corporations to deal with a long-standing problem: harmonizing their charts of accounts. When they have disparate charts, the process of rolling up and consolidating data from all of the accounting entities can be laborious. Having a single chart of accounts (COA) across all businesses would simplify many time-sensitive processes at the ends of fiscal periods. For most Global 2000 companies, achieving a single COA is undesirable or problematic for operational and political reasons. The business systems of their major operating units may be distinct enough to warrant different treatments, and managers of subsidiaries often have vested interests in maintaining those differences. Many Global 2000 organizations that have attempted to achieve a single COA (and even some that claim to have one) have been thwarted or have had to accept major limitations that in the end failed to produce the desired benefit. A master data management approach may succeed where others have failed.

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The chart of accounts is a list of all account names and numbers used in a company's general ledger. While there is commonality in account names in the aggregate (for instance, “accounts receivable” or “lease expense”), at a detailed level, different types of businesses have differences in account names and numbers that reflect different practices and processes. Where the COA is not statutorily defined (as it is in many European countries), differences also arise because of the idiosyncrasies of the accountants who designed each one. Small and medium-size businesses usually have a single chart of accounts; if more than one exists, the distinctions are trivial. Larger corporations, particularly those made up of dissimilar businesses or that operate in multiple tax jurisdictions, can have diverse COAs in these business units. Mergers further complicate the picture, since an acquired company almost always will have accounting approaches and systems that diverge from the parent’s.

The main objective of harmonizing COAs is to speed the consolidation, closing and reporting cycles by reducing the amount of manual work required for their completion. Other benefits include greater transparency and limiting the chance of fraud and errors that are the inevitable by-product of any manual system. Standing in the way of harmonization has been resistance by business unit managers that have vested interests in assessing their results according to their definition of the account structure. The direct expense of having to maintain dissimilar COAs is the extra time required to roll up and consolidate the periodic results (including the time spent finding and correcting errors); indirect costs include lags in getting critical business information to managers, limited transparency, lack of accountability and distorted measurements of operating results.

The major obstacles companies encounter in harmonizing their COAs are the politics of achieving agreement on the ultimate COA as well as the time-consuming nature of making changes to all the accounting systems. The promise of MDM is that by creating a software-defined abstraction level, top-down decisions about the “virtual” chart of accounts can be effected without having to change underlying systems. In theory, much of the politics could be eliminated from the definition of the virtual chart of accounts, but at a practical level there must be some acceptance by operating managers. Moreover, having an abstraction level should enable companies to have parallel rather than sequential or iterative consolidation paths for statutory, management and tax accounting. This would produce a faster, cleaner financial reporting process, simplify and accelerate management reporting, and allow companies to centralize control over financial and managerial reporting if they prefer and manage tax implications far earlier in the closing cycle than is possible today.

Assessment
MDM is neither a “magic bullet” nor a “set it and forget it” solution. It is a discipline that requires up-front thought and ongoing work as well as management of corporate politics. It demands a non-trivial investment up front, refinements in the first several years of operation and ongoing maintenance. MDM also requires finance, lines of business and IT to engage fully in the initial steps to make it a workable reality. It is, in other words, a significant enterprise undertaking. However, the measurable payoffs from implementing a master data management approach to the chart of accounts could be considerable. Ventana Research estimates the payback for most Global 2000 corporations will be rapid and ongoing.

About Ventana Research
Ventana Research is the leading Performance Management research and advisory services firm.  By providing expert insight and detailed guidance, Ventana Research helps clients operate their companies more efficiently and effectively. These business improvements are delivered through a top-down approach that connects people, process, information and technology. What makes Ventana Research different from other analyst firms is a focus on Performance Management for finance, operations and IT. This focus, plus research as a foundation and reach into a community of over two million corporate executives through extensive media partnerships, allows Ventana Research to deliver a high-value, low-risk method for achieving optimal business performance. To learn how Ventana Research Performance Management workshops, assessments and advisory services can impact your bottom line, visit www.ventanaresearch.com.

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