• Paul Rothwell, Partner |
  • Maudy Eijkhoff, Manager |
  • Erik Gielstra, Manager |

In this article, we talk about the benefits of automated accounting generation that is based on clearly defined business events and how this, in conjunction with a solid accounting hub, can transform the way the finance function performs the accounting and control activities, dramatically improving first-time-right execution and freeing up time for more value-adding activities, such as expert-based narratives and analysis. 

What is business event-driven accounting?

In essence, event-driven accounting triggers are described and used to identify business events. Accounting logic is formulated for these business events, leading to journal entries per singular event. By standardizing and documenting accounting rules for each business event, organizations greatly improve the (technical) control and alignment with accounting policies, which will prove useful for audit purposes. By automating event-driven rules, the ledger can be regularly updated, resulting in increased predictability in accounting and reporting processes, which in turn can accelerate the closing process, thus allowing cost efficiencies and more time for analysis and future- proofing the organization. 

Pitfalls of legacy accounting methods and way of working

Making changes requires fully comprehending the current way of working as well as the downstream implications on processes, risk and controls. Adapting a clear, controllable accounting policy is easier said than done. When starting to build an automated data feed to facilitate transactional accounting, initial requirements and accounting logic are often documented. However, over time some changes may have been made to the accounting logic to adapt to the ever-changing regulatory reporting requirements. Strict deadlines and guidelines often lead to a minimum viable product, which gets the job done but is rarely efficient, as it requires manual adjustment. As the resources with the right capabilities are limited, the cost of implementing these new data requirements have been offset against a manual work-around, and the decision has been made to keep the system as is, opening the door to human error and creating the need for additional controls and delays in the closing process. The knowledge of existing (customized) accounting procedures has often been built up over the years, divided over multiple people and teams without any structured documentation. The accounting logic might be integrated in the system configuration to the extent that reviewing it would lead to technical specifications, which is not comprehensive for the finance team. A valid decision at the time, which no longer meets today’s data requirements.  

Let’s also not forget the number of stakeholders that is involved in changes to the accounting process, as a team can often be in control of their own part of the chain but rarely oversees the full end-to-end process and therefore cannot estimate the downstream impact of the changes on the rest of the organization. 

How does business event accounting improve the finance function?

Besides mitigating risks such as the departure of a colleague, a system crashing or a human error in manual entries, automating event-driven accounting vastly increases the first-time-right entries initiated by day-to-day business triggers. Automating mutations from transactional accounting is, however, only the beginning. Implementing an accounting hub creates opportunities for simplifying finance processes down the line, by including periodic (risk) calculations and reducing the need for manual entries, whilst documenting the accounting rules for validation against the accounting policies. Moreover, all this establishes a solid control framework where data lineage and consolidation between systems can be safeguarded by automated controls. By standardizing and documenting accounting rules for each business event, the formulated business rules recognize the business event and post the relevant debits and credits into the general ledger. This greatly improves the (technical) control and alignment with accounting policies, which will prove useful for audit purposes. Based on the business rules, organizations can also recognize and tag the business event to set up automatic feeding into the appropriate movement schedule.

A controlled change includes buy-in from all relevant stakeholders that impact the end-to-end process. Therefore, this should be a joint effort between Finance, IT, Regulatory Reporting and Risk. IT leads the technical implementation, whilst Finance remains responsible for the functional implementation of accounting policies. Furthermore, modern accounting hub solutions provide Finance with the tools to self-implement updates to the accounting rules, ensuring vast improvement in quality and control, since the business and regulatory requirements will inevitably continue to develop over time.  

Where to start: Define the future and create a solid plan

Moving to business event-driven accounting is conceptually simple but can be complex in practice if structure is lacking. There are many dependencies to consider, and often important steps in the process are missed. The five-step process below ensures a good start on your transformation journey:

  1. Create a vision: What does good look like? What are better practices that our organization should adopt and how can Finance add more value to the business? How well does Finance function on its core activities when benchmarked against peers? Determining a vision for the future inspires and gives direction to transforming the finance organization. 

  2. Identify the sources: What information and logic is currently being used to post accounting entries from business events into the general ledger, and where is this information coming from?

  3. Evaluate the process: How well does this process work in terms of throughput time,  First Time Right, employee time spent, employee satisfaction and the extent to which it fulfills requirements within Finance or the business.

  4. Assess the business case: Evaluate and substantiate the need for change. Describe how it fits in the overall finance strategy, which stakeholders benefit from the change and how to gain support. 

  5. Determine the target state: Determine guiding principles for selecting a supporting solution (if not already present) and guiding principles on which kind of processes and inputs are viable for processing. Subsequently think of a good minimum viable product and a road map for the future and start actively gathering support to realize the change.