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Solution
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TCS Consulting Services to Achieve Success in the Digital Era
Highlights
- Organisations are looking at the CFO Function as a critical source of support for formulating business strategies and effective decision-making which has made it necessary for the CFO function to undergo transformation.
- One such area of transformation is in rationalization of chart of accounts (CoA) which is one of the important pillars on which the foundation of transformation is laid out
- The chart of accounts is midway through its transformation, with a maturity score of 2/4, 35% redundancy, and poor governance marked by inconsistencies, overlaps, and inaccuracies in financial substantiation
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Overview
Chart of accounts rationalization
Chart of accounts rationalization is a critical step in finance transformation, enabling organizations to streamline their financial reporting and enhance operational efficiency. By consolidating and standardizing account structures, businesses can eliminate redundancies, improve data accuracy and ensure consistency across financial processes. This approach not only simplifies compliance and reporting but also empowers decision-makers with clear, actionable insights, positioning organizations for sustainable growth in an increasingly complex financial environment. Let’s explore more.
Challenges
Challenges in managing the chart of accounts: key obstacles and pitfalls
Complex ledgers: Initially the chart of account structure is very simple and but as the organisations matures, they become more complex due to mergers & acquisitions, new lines of business, legacy applications, etc. Poor integration with other upstream (source systems, product processors etc.) and downward systems (reporting systems etc.) adds to the complexity of the ledgers in terms whether transactions have flown properly or not.
Inefficient and delayed reporting: Due to complexity of the ledgers and legacy issues pertaining to the CoA structure, there is a slowdown in performing various activities post period-end (month end, quarter end etc.). One of the main functions which gets slowed down is reporting function. All type of reporting like management reporting, statutory reporting, regulatory reporting are delayed as they are dependent on GL balances and their reconciliation. In some cases, it becomes impossible to perform the reporting activity and manual workarounds are established to perform reporting, which further adds to inefficiencies and complexity.
Lack of scalability and flexibility: Due to overly complicated and slow data migration of newly acquired businesses, it becomes very difficult to handle the harmonisation and integration of chart of accounts, as it adds to the complex CoA Structure. Also, data migration from the old to new systems is slowed down. This makes the CoA structure inflexible and non-scalable.
Unnecessary journals and data entry errors: The addition of new lines of businesses, legacy system challenges, and data migration from mergers & acquisitions often result in fragmented financial structures. This complexity gives rise to manual processes and workarounds, leading to an increased volume of manual adjustments and journal entries. This increases the risk of data entry errors which may have serious consequences on the reporting of financial statements.
High cost of audit effort: Due to manual processes and workarounds, the risks of errors and non-compliance increases significantly. A substantial investment is required for auditing and ensuring that there are no critical gaps in the process
High cost of COA data maintenance: The costs for maintaining CoA data is very high. The cost is likely to continue increasing until the CoA is effectively rationalised.
Lack of CoA framework and governance: A clear policy and procedure for the CoA should outline impactful events, processes to address them, and strategies for harmonising and integrating the COA efficiently. It should also define the creation, modification and deletion of accounts under various events, along with an exception process for instances that deviate from the standard procedures.
Solution
Approaching chart of accounts rationalization: a strategic framework
We recommend the following approach to the chart of accounts transformation:
Current state analysis:
We should perform assessment and capture the “as-is” process as per current landscape. This will include understanding the stakeholder’s requirements, reviewing GL ledger and CoA structure and referencing data management solution in place including CoA /hierarchies. The biggest challenge for organisations is not having a single source of truth due to legacy issues. This makes it very difficult to perform reconciliation and reporting. This leads to further inefficiencies like outdated manual processes, manual reconciliation, prolonged period-end close and delayed group management reporting.
Gap analysis, thereby defining the target state:
We should analyse the current state and pain points in the process. Normally the impacted areas pertain to data management, GL accounts, reporting and analytics. We need to understand the key transformation levers for CoA transformation and compare those levers with the best in the industry. We need to outline best practices (thin ledger concept, cross validation rules, trial balance, manual journals etc.) that will help us at the time of design and implementation. We need to finalise target state accounting transformation architecture and perform gap analysis. This will help in transition from current state to future state following best practices in the long term.
Post implementation of CoA transformation, we have realized the benefits below:
- Centralized way of managing COA and framework in place to avoid proliferation of general ledger accounts. Well-defined processes for COA ownership, governance and maintenance
- Optimized number of dimensions
- Streamlined segment usage, hierarchies
- Better control through cross validation rules (CVR)
- Streamlined global chart of accounts, thin general ledger
- Single source of truth, FA and MIS are aligned and reconcilable
- Improved financial analysis at granular level
- Improved internal controls analysis due to thinner COA
Way forward
In a nutshell, we should perform a detailed assessment of chart of accounts to understand the challenges and areas of transformation. Following this, we can conduct an impact assessment to evaluate the effort required to implement the target OCOA, including group accounts in BPC, the existing BPC parent hierarchy, impacts on downstream systems, and other related factors. This will help in developing a detailed implementation roadmap and a data migration plan.
Have you started your chart of accounts rationalization?
