Reengineering the Accounting and Finance Functions

By Vollmers, Gloria | The CPA Journal, May 1997 | Go to article overview

Reengineering the Accounting and Finance Functions

Vollmers, Gloria, The CPA Journal

The Reengineering Movement the inclination to reduce costs while maintaining service and productivity, the drive for efficiency, has swept the country in recent years resulting in excellent and quick returns to shareholders. The returns have been due largely to layoffs, sometimes so massive that they reach the front pages of newspapers, news broadcasts, and talk shows. Some believe that the largest companies have completed the majority of their cutbacks and it is unlikely that we will see much more of these sudden and large layoffs. However, the desire to control costs continues and albeit, in smaller numbers, so does downsizing.

Long viewed as nonvalue adding operations and as necessary evils, accounting and finance activities have become prime targets for cost containment. The management accounting journals of the United States, England, and Canada have been peppered with articles on this topic over the past few years. They have identified the accounting functions most likely to produce cost saw ings if reengineered. They have also outlined approaches to the task of reengineering and listed or offered case studies of companies that have successfully overhauled their accounting and finance departments. While discussions of reengineering use the language of productivity, timeliness, and usefulness, the results usually reduce transactions, placing costing activities on source (production) personnel, and taking them away from the accounting department. Or, it may require sending activities and processes out of the firm entirely, through outsourcing.

While paper, ink, and computing time may be saved, substantive cost-cutting efforts in these areas will result only if personnel is reduced. Though better and more timely financial and managerial reports may improve the decision-making capability of upper level management and lead to future profits, those profits will always be greater and more immediate if productivity were so enhanced that personnel could be released. According to T. Sheridan in the April 1996 issue of Management Accounting (England): "The message to the financial people (is) unequivocally clear. Business leaders are trying to get hugely more value from the finance function while cutting down on its staff."

Depending on viewpoint, the direction this path is taking is either good or threatening. From the company's side, it is good to reduce cost while maintaining productivity. The company benefits, the stockholders benefit, and the customer may benefit as well. For the management accountant, on the other hand, this trend threatens existing jobs and for the student nearing graduation, it reduces the potential of employment. CPAs in public accounting considering corporate employment should be aware of the shrinking opportunities and be able to identify and avoid bloated accounting and finance departments that may be ripe for redesign.

How and Where to Look for Cost Savings

The CPA wanting to create value for his or her client needs to know where to look. A perfectly competent professional, having worked for a company for years, may be blinded by familiarity and unable to readily see areas of potential improvement. The following suggestions, in no particular order, may offer some guidance.

* Look for signs of operational breakdowns. Are monthly closings difficult and time consuming? Does it take too long to cut travel and entertainment reimbursement checks? Are payroll or accounts payable costs rising out of proportion to the numbers of employees or suppliers? Are the managers of other functions complaining that their informational needs are not being served?

* Obtain benchmarking studies and compare the cost of your company's finance functions to those of peer companies.

* Starting with the benchmarking studies, identify the areas where cost savings are most likely to be found and consider how to make the improvements.

Benchmarking-a Tool for Improving Service

Several studies are now available that have surveyed and measured accounting and finance functions in the U.S. and abroad. They measure the costs of these functions in companies of various sizes in various industries, finding ranges and identifying those best practice companies that have managed to minimize costs in particular areas. A.T. Kearney published two European Benchmarking Studies on the finance function in 1993. In 1994, at the Conference Board Europe's European Finance Forum, the results of that study were discussed and highly praised by companies that benefitted from the study. The AICPA and The Hackett Group reported in the November 1996 issue of The CPA Letter that the results of their ongoing benchmarking study were available. The study reported a 36% decline in finance costs from 1988 to 1996 arising from streamlining and leveraging technology. Despite large cost reductions, they reported that there is still considerable room for improvement.

Benchmarking has become a popular and successful tool. The studies allow companies to compare themselves to peer companies that have been identified as examples of best practice. If a company's accounting and finance costs comprise two percent of gross revenues while peer companies only expend 1.2% of their gross revenues on the same functions, there is some evidence that those costs might be trimmed. Specific functions should then be compared. In the September 1995 issue of CFO-The Magazine for Senior Executives, Stephen Barr and Mary Driscoll catalogued some of the best practices found in core financial areas in major firms surveyed. While it did not identify specific costs, it did describe how these key financial processes are handled in the best practice companies.

Guides to Reengineering

The Financial Executives Research Foundation's Reengineering the Finance Function (1995) and the Society of Management Accountants of Canada's Exposure Draft, Redesigning the Finance Function, both provide guidelines for the companies interested in making changes. The steps include investigation, planning, and implementation. Investigation involves identifying areas that need improvement, studying existing costs, comparing them to benchmarked firms, and garnering top management support for what will undoubtedly be a major effort. Planning includes developing a vision for the end result, timing, plans to handle the transition period, and building support for the effort. Implementation includes assigning responsibility, measuring intermediate results, reacting to feedback, handling people affected by change, and assuring adherence to new systems.

A complete redesign is not a necessity and may be too disruptive to consider. A company may choose to troubleshoot and reengineer selected costly areas. The focus of reengineering should be to reduce the time spent on necessary but nonvalue adding transaction processing functions, such as, payroll, accounts receivable, and accounts payable vs. areas of decision usefulness, such as, performance analysis, budgeting, and cash management.

The nonvalue transaction processing functions are time and personnel intensive. If the number of transactions could be reduced, many businesses could benefit. Regarding payables, (e.g., Can the number of vendors be reduced? Can orders be placed via computer?) both would reduce paperwork. C. Bokman, in the December 1996 issue of Management Accounting presents a simple case study of how General Marble improved its financial reporting and purchasing functions.

For businesses whose employees do extensive travelling, the process of travel expense processing and reimbursement is time consuming, paper producing, and costly. It includes travel requests, cash advances, making reservations, matching expense reports to receipts, following up on missing receipts and inappropriate charges, and preparing reimbursement checks. The company could immediately cut costs by issuing travelers a company charge cardincluding interest rates negotiated with the bank-for travel expenses only, and which permits cash withdrawals at ATM machines. If expense reports are needed beyond the credit card, they should be submitted via online terminals. Reimbursements, if needed, should be included on the next payroll check. Perhaps most important, firmwide travel policies should be established. Only a sample, not the complete population, of expense reports should be audited. Of course, reports violating policy should be appropriately dealt with.

Another cost saving possibility for some companies is outsourcing. If some function is becoming too expensive, and especially if it requires an expertise that must remain current, it may pay to allow another company to handle it. According to the December 1995 issue of Management Accounting, The Economist Intelligence Unit and Arthur Andersen, in a study of outsourcing, found that 26% of companies that outsource-and many do-outsource some part of their finance function. Also, 42% expect to outsource in the near future. Of those currently sending out accounting work, the functions of pension management, payroll, and fixed asset appraisal are the most common. For those planning to outsource, pension management, payroll, short-term investment management, accounts payable, accounts receivable, asset appraisal, internal audit, and leasing are the most likely candidates for outsourcing. These functions are transaction-heavy or require a lot of expertise.

Outsourcing may be a cost saver, but a company should first assess whether the costly activity might be reengineered internally for equal savings. Is it possible to negotiate with suppliers so that single bills are sent out monthly? Could orders and payments be performed electronically, eliminating paper altogether? Can purchases of limited dollar amounts be placed directly by the supervisor needing them, eliminating many purchase orders and the need to match them later to the voucher? What are the best practice firms doing.

An area generating a lot of expense is the poorly designed or completely undesigned information system. For a variety of reasons, in many companies data is keyed in more than once because multiple data bases are maintained. Perhaps because of quick growth, the company has patched one system on top of another and has not been able to integrate them. These legacy systems can generate a lot of costs. Or, the primary accounting software that is used cannot produce the reports that some members of the management team need. These managers then need people to reenter data into another package or spreadsheet so that it can be organized into another format. The increased need for nonfinancial information, such as customer complaints, market share, or time to serve customers during peak hours rais es computer requirements. An integrated, networked data base may well be worth the cost of design, installation, and training.

Do not forget the Total Quality Management movement. In the May 1996 issue of Management Accounting, Robin Cooper warns that new costing techniques, such as "Just in Time Inventory Management," push cost accounting activities onto production personnel. If they are continually reducing costs and making sure that products do not emerge with defects, then many of the old duties of the cost accountant disappear.


Michael Goldstein, CPA The CPA Journal

[Author Affiliation]

By Gloria Vollmers, assistant professor of accounting, University of Maine

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