Flux Capacity – Benefits of Leveraging Oracle ARCS for Variance Reporting
Companies perform flux analysis, a period-over-period review of changes in balance sheet accounts as a key control during the close process to help validate the ending balance. The analysis is conducted to confirm that all major fluctuations of balances for each account (or group of accounts) are justified and no changes have been made in error. Many auditors ask their clients to explain balances over a certain threshold or unexpected balances as part of their review process. Clients who conduct a flux analysis on a regular basis can quickly respond to these requests. In this paper, we will discuss best practices around flux analysis and the benefits of using Oracle ARCS to facilitate the workflow process.
When establishing the flux analysis, companies determine what should be reviewed (accounts), when they should be reviewed (materiality) and the review process. Balance sheet accounts typically include groups of accounts which are more detailed than external reporting, but higher level than individual accounts. For example, for the external reporting line, Account Receivable (AR), the following accounts may be examined:
- Accounts receivable – Trade, Gross
- Allowance for doubtful accounts – Trade
- All other receivables
The review does not include all the detailed accounts under “All other receivables” such as allowance for customer returns, VAT receivables, income tax receivables, etc. In this example, the company determined that these accounts could be grouped together without impacting any variance explanation.
Accounts are reviewed and explained for all variances deemed “material.” Materiality is company specific, but typically considers total dollar or percentage changes in balance or a combination of both. For example, explanations may be required for all account variances greater than $1M and 10% from the prior period.
The process used to define the variance is company specific. Typically, the individual performing detailed account reconciliations will explain the variance which is then reviewed by a supervisor / account owner. An additional review level may also occur for part of or the entire balance sheet. The user completing the explanation should explain why the account fluctuated significantly in an easy-to-understand manner.
Benefit of leveraging Oracle ARCS for Flux Analysis
If an automated tool (such as Oracle ARCS) is not used, most companies capture their Flux analysis in Excel and use a shared drive or SharePoint to capture / track the results. While these tools can capture the commentary required, they lack features such as automatically updating balances, monitoring, consolidating results and work flow.
Oracle offers a solution to enhance the flux analysis process within the ARCS tool. Oracle ARCS can monitor the account reconciliation data captured in the system and create reports that highlight the accounts which require explanations based on changes over a certain period (e.g. month over month, year over year, etc.) ARCS preparers and reviewers of account reconciliations are already very familiar with transaction details in their assigned accounts and have the right knowledge to provide supporting explanations for material variances in their accounts. The application can accelerate the process with rule sets so users can focus on accounts which have variances above the defined thresholds. With some additional configuration, Oracle ARCS can automate and report on the workflow during the entire close process. The workflow feature gives users visibility to status of all accounts at any point in the process in real time. When a preparer provides an explanation, workflow will automatically let the reviewer know the account is ready for review. Any issues or questions by reviewers or internal or external auditors can be addressed quicker, and the entire process will run more smoothly, driven by the application workflow and automated notifications.
Performing Flux Analysis in Oracle ARCS
The flux analysis process can be performed within the Oracle ARCS Reconciliation Compliance module. This offers a seamless transition between balance sheet account reconciliation and balance sheet flux analysis for preparers and reviewers. The set-up is simple:
- Define reconciliation type
- Define template
- Establish workflow
- Determine data integration
From the reconciliation list view, users can filter provisioned reconciliations based on process:
By selecting variance (flux) analysis from the process filter, the end user switches from period-end reconciliation to period-over-period flux analys
Standardized Flux Analysis Template
Reconciliation templates determine the method of reconciliation. Templates provide a centralized administration point to drive standardized processes and enforce workflow actions.
Flux analysis will use the “Variance Analysis” template to compare period-over-period source data. For example, the reconciliation template will populate the current period balance and automatically pull in previous period balance for comparison.
The frequency values are defined within the initial setup of the application and typically categorized as quarterly, semi-annual, and annual for flux analysis. Selecting the frequency in the template will determine the period in which the flux analysis occurs and the compared source data set. Based on this categorization, ARCS will develop reports which compare the account balance against the defined frequency. For example, if the frequency is set to monthly, it will compare the balance against the previous month. Based on the client and industry, different frequency comparisons will apply. Companies with high seasonality likely will use an annual (year over year) comparison, while companies with stable business models, will compare monthly, or quarterly data.
Variance analysis shares a common workflow with balance comparison wherein the user is presented with two source data sets and must explain the variance. The balance differences that are below the materiality thresholds can be marked as completed to eliminate unnecessary review.
When the period-over-period variance exceeds the auto reconciliation criteria, the preparer will provide commentary on the variance explanation tab. The variance explanation tab provides the amount and required inputs to explain the variance activity. This commentary will be pulled into reports to review. As an example, there could be a major change within the account receivable trade balance, which requires an explanation. The change is due to a $8M dollar increase in volume due to a promotional campaign during the World Series. Commentary on the variance analysis forms are pulled in to reports that can be analyzed by key stakeholders.
The Hackett Group is an experienced partner to configure Oracle ARCS to enhance / automate the flux analysis process. We have successfully helped clients use this technology to improve controls around the flux analysis process, automatically identify fluctuations exceeding defined thresholds, notify reviewers and approvers when they have tasks to complete, and maintain documentation of explanations. Clients who leverage this functionality benefit by easily identifying when accounts require commentary or justifications. In addition, they can respond quickly to request from auditors. As a result, clients have realized improved efficiency (e.g., less time performing flux analysis) and effectiveness (e.g., better explanations).
About the Authors
Kars Stal, Associate Principal, EEA Transformation
Mr. Stal is an Associate Principal in the Enterprise Performance Management, Enterprise Resource Planning, and Analytics (EEA) practice at The Hackett Group. Mr. Stal has over ten years of consulting experience in delivering enterprise performance management process and system improvements to Fortune 500 clients. He has focused on designing and implementing enterprise performance management solutions, reducing the monthly close cycle, delivering large scale implementations of financial and management reporting systems, facilitating client meetings and workshops to support wide-scale change, and acting as a subject-matter expert on consolidation and reconciliation processes and systems.
Ditha Wiersema, Senior Director, EEA Transformation
Ms. Wiersema has over twenty years of experience in finance function performance improvement areas, including financial process reengineering, financial consolidation and reporting, SOX compliance, multidimensional profitability reporting and analysis, data integrations, and budgeting and forecasting. Ms. Wiersema’s experience includes defining financial (EPM) blueprints, analyzing and improving financial and accounting processes, enhancing use of system functionality, reducing the closing cycle, and managing large-scale projects and implementations. She has successfully led engagements at numerous Fortune 500 companies with documented success of improved and more efficient processes and systems. Her experience spans a variety of industries including financial services, oil and gas, retail services, and industrial.
Marc Atos, Director, Close and Consolidation
Mr. Atos is a Director in the Enterprise Resource Planning, Enterprise Performance Management, and Analytics (EEA) practice at the Hackett Group. He has over ten years of experience in the design, development, implementation, and support of various financial system technologies through consulting and industry. Mr. Atos is an Oracle certified account reconciliation specialist with data integration and financial system consolidation experience. He has successfully managed multiple Fortune 500 global account reconciliation implementations.
Caroline Bennett, Manager, EEA Transformation
Ms. Bennett is a Manager in The Hackett Group’s Enterprise Resource Planning, Enterprise Performance Management, and Analytics (EEA) practice. As part of the Hackett team, Caroline has experience in the areas of EPM technology implementations, Process Design, FP&A Organizational Design and Project Management in a variety of industries. Through her project work and personal research, she has developed knowledge for the best practices in the close and account reconciliation processes, including process design and technology levers.