The Financial Close Process in German Corporations: Developing and Testing A Theoretical Model

Deshmukh, Ashutosh; Holzmeier, Maximilian Article The Financial Close Process in German Corporations: Developing and Testing A Theoretical Model Journal of Accounting and Management Information Systems (JAMIS) Provided in Cooperation with: The Bucharest University of Economic Studies Suggested Citation: Deshmukh, Ashutosh; Holzmeier, Maximilian (2023) : The Financial Close Process in German Corporations: Developing and Testing A Theoretical Model, Journal of Accounting and Management Information Systems (JAMIS), ISSN 2559-6004, Bucharest University of Economic Studies, Bucharest, Vol. 22, Iss. 2, pp. 346-371, https://doi.org/10.24818/jamis.2023.02008 This Version is available at: https://hdl.handle.net/10419/310864 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/4.0/ Accounting and Management Information Systems Vol. 22, No. 2, pp. 346-371, 2023 DOI: http://dx.doi.org/10.24818/jamis.2023.02008 The financial close process in German corporations: Developing and testing a theoretical model Ashutosh Deshmukh 1 ,a and Maximilian Holzmeierb a Distinguished Professor of Accounting & MIS, Penn State Behrend, USA b Senior Manager, bei KPMG AG and Researcher, University of Hohenheim, Germany Abstract Research Question: What variables affect the days to financial close for corporations? Motivation: The tightening of reporting deadlines, new disclosure requirements such as using XBRL, and ever-increasing demand for high-quality financial information have increased attention to the financial close process. However, academic research is sparse in this area, and no paper has developed a theoretical model for the financial close process. Data: The data were collected from 55 German corporations in different industries. Tools: The questionnaire survey was used to collect the data, which was analyzed via multiple regression techniques. Findings: The statistical analysis indicates that the model’s overall fit is high. The technological challenges and technological strengths come out to be the most important explanatory variables. However, the peripheral challenges and the number of consolidating entities have a counterintuitive result; those variables are negatively related to the days to close. Also, size was significantly positively associated with days to close. Based on the practitioners' opinions, we also identified the critical best practices in the accounting and technology areas. Contribution: The contributions of this paper are as follows. We develop a pioneering theoretical model for the financial close process based on academic and practitioner research. The model indicates a high explanatory power indicating that our research has further potential. The technological abilities of the organizations are the most significant determinants of the days required for the financial close process. Finally, the rank-ordered 1 Corresponding author: Ashutosh Deshmukh, Department of Accounting & MIS, Penn State Behrend, Erie, PA 16563, USA. Tel. (+1) 8148986438, email address: [email protected]. The Financial Close Process in German Corporations: Developing and Testing a Theoretical Model Vol. 22, No. 2 347 best practices should provide guidance to the consultants and accountants. The broader implications for further research are also discussed. Keywords: the financial close process, days to close, last mile of finance, best practices in the financial close process JEL Codes: ML 41 1. Introduction This paper aims to investigate the variables that affect the days required for the financial close. The financial close process refers to the end-of-period process of updating accounts, making accounting adjustments, and may include steps such as reconciliations management, foreign currency translations, consolidations, and financial control compliance, among other things (PCAOB, 2007; Gartner, 2007). The tightening of reporting deadlines, new disclosure requirements such as using XBRL, and ever-increasing demand for high-quality financial information have increased attention to the financial close process. Additionally, Gallemore and Labro (2015) use the speed of the financial close process as a proxy for the quality of a company’s internal information environment. The increased focus on the financial close process has resulted in an explosion of financial consolidation tools (Gartner, 2016). However, academic research is sparse in this area, except for a couple of papers. Janvrin and Mascha (2014), based on the literature review, identify the following factors that affect the financial close process: the need to meet or beat analyst expectations, collaboration among multiple participants, the process of management estimates, and the impact of new regulations such as Sarbanes Oxley (SOX), SEC’s XBRL mandate (SEC, 2018), and complex accounting standards (for example, FASB, 2007). i The authors also list risks and obstacles in the financial close process based on the field investigation, some of which are later used in developing our model. Janvrin et al. (2020) also investigate how auditors audit the financial close process in SOX (404b) integrated versus a financial statement audit. However, no paper has developed a theoretical model for the financial close process to the best of our knowledge. The practitioner literature discusses numerous problems and best practices in the financial close process (Keller, 2006; KPMG and Trintech, 2021; Parcells, 2016), which we use in our study. We develop a comprehensive model for the financial close process and test it using a survey of German companies. The study addresses three questions. Accounting and Management Information Systems 348 Vol. 22, No. 2 1. How are the challenges – accounting, technological, organizational, and peripheral –related to the days for the annual close? 2. How are the strengths – accounting and technology –related to the days for the annual close? 3. What is the explanatory power of these variables? Thus, the variables that affect the days required in the financial close process are accounting challenges, technological challenges, organizational challenges, peripheral challenges, accounting strengths, and technology strengths. We developed a detailed questionnaire to measure these variables. Using a survey methodology, we collected information from German companies. The results indicate that the variables have significant explanatory power, the R2 in the first regression is .28, and the second regression is 0.36. Such large R2 values suggest that the model developed in this study has potential. The technological challenges and technological strengths emerge as the two most important variables that affect the days to close. The peripheral challenges and the number of consolidating entities have a counterintuitive result; those variables are negatively related to the days to close. This needs further investigation. Also, size was significantly positively associated with days to close. The paper contributes to the literature in the following areas. First, the paper develops a pioneering theoretical model for the financial close process based on previous research. Second, this model is tested using empirical data collected via the survey method. Data collection has been a problem in this area. Third, the model has high R2 values indicating significant explanatory power, which suggests that this line of inquiry has potential. Fourth, our analysis indicates that technological challenges and strengths affect the days to the financial close most significantly. Thus, technological sophistication may result in wide variation in the days required in the financial close process. Finally, there are some counterintuitive results, such as peripheral challenges and the total number of consolidating entities being negatively related to the day required for the financial close process. This poses further questions regarding the interplay of these variables with technology and the size of the corporation, and the need to further expand the sample and conduct research in different national settings. The rest of the paper is organized as follows. Section 2 reviews the literature and develops a theoretical model. Section 3 discusses the research design and presents the statistical analysis. Section 4 discusses the effectiveness of various best practices to aid the financial close process. Finally, section 5 discusses the results and concludes the paper. The Financial Close Process in German Corporations: Developing and Testing a Theoretical Model Vol. 22, No. 2 349 2. Literature review and hypotheses development What is the accounting/financial close process exactly? PCAOB Auditing Standard No. 5 describes the period-end-financial reporting process as follows: 1) procedures used to enter transaction totals into the general ledger, 2) procedures related to the selection and application of accounting policies; 3) procedures used to initiate, authorize, record, and process journal entries in the general ledger; 4) procedures used to record recurring and nonrecurring adjustments to the annual and quarterly financial statements; and 5) procedures for preparing annual and quarterly financial statements and related disclosures. Gartner’s (2007) report defines the financial close as a process for accumulating data from multiple legacy and ERP solutions, messaging the data with Microsoft Excel-based and enterprise-applications-based processes, ensuring exactness, and preparing financial and operational reports. Janvrin and Mascha (2014) define the financial close process as a company’s ability to complete its accounting cycles and produce financial statements for internal management and external legal reporting while working under time (and potential resource) pressure. These definitions indicate that the financial close process touches almost all the finance and accounting functions. The financial close process literature also often includes the term – the last mile of finance. Adler (2006) defines the last mile of finance as the series of steps involved in the close from consolidation through the company’s public disclosure of its financial results. Gartner reports (2010, 2016) include the following steps in the last mile of finance – financial close process management, reconciliations management, journal entry control, intercompany transaction management, consolidations, tax preparation, financial control testing, and financial statement production and disclosure management. Driscoll (2012) sums up the last mile of finance as the close- to-disclose process. The exact sequence of these steps in the last mile of finance may not be the same for all corporations. Also, depending on the size and complexity of the corporation, the required steps may differ. We present a generalized process flow of the financial close process based on these various descriptions. Accounting and Management Information Systems 350 Vol. 22, No. 2 Figure 1: A General Description of the Financial Close Process Most academic and practitioner research in the financial close process is US-centric. As such, we draw on this research to build a theoretical model. The financial close process in the US began to garner more attention with the increasing automation of accounting functions and regulatory requirements for faster reporting. The literature describes different types of financial close, and also, there needs to be more terminological clarity; the same term may be defined slightly differently by various authors. Also, the meaning of the terms keeps evolving. Janvrin and Mascha (2014) classify the financial close process into the following categories. First, the hard close focuses on external reporting, where the accuracy of financial information is critical. The process generally takes place at the end of the year or quarter. The books at the year-end may be sealed and cannot be altered. Second, the soft close refers to the month or quarter-end closing for internal management reports. Third, the virtual close, which is the ability to close the books and generate financial statements at any time (O’Leary, 2012; Bragg, 2009). Doxey urchasing ccounts ayable Cash isbursement ayroll nventory nventory Sales ccounts Receivable Cash Receipts ixed ssets ntangible ssets ccounts ayable Operating Expenses Cost of Goods Sold ear End nventory Boo alue Compare ith hysical nventory (only at the fiscal year end) Sales Revenue ccounts Receivable Cash ccount ear end ixed and ntangible sset Boo alue Good ill aluation ayables ccruals Expense ccruals Cost of Goods Sold nventory d ustments Revenue ccruals epreciation morti ation ccruals Reconciliations anagement Translations ntercompany Transactions anagement Consolidations inancial Control Compliance inal d ustments anagerial Revie inancial Statements and ootnotes isclosure anagement The Financial Close Process in German Corporations: Developing and Testing a Theoretical Model Vol. 22, No. 2 351 (2020) contends that a soft close requires a limited number of closing steps compared to a virtual close. Finally, the process is called early close or forecast if the financial statements are estimated before the year-end. Responding to the market criticisms of companies not having visibility into their financial statements, Cisco partnered with KPMG to reengineer their accounting systems. Around 2000, Cisco closed the books in less than 24 hours and became a symbol of new economy financial management (Jablonsky, 2001; Berinato, 2001). This is the first well-publicized case of virtual close. Jablonsky, 2001, in the broader context, describes virtual close as the development of a virtual finance organization. O’Leary (2012) discusses this initiative’s successes, failures, and further developments. The academic research is scant except for a few notable papers. Janvrin and Mascha (2014) investigate the financial close process through a detailed literature review and field investigation. The paper aims to stimulate further research on the financial close process. Based on the literature review, the authors argue that further research is required in the financial close process. For our purposes, the relevant findings of this paper investigate the problems encountered in the closing of the books. Based on the literature review, the authors identify the following factors: the need to meet or beat analyst expectations, collaboration among multiple participants, the process of management estimates, and the impact of new regulations such as Sarbanes Oxley (SOX), SEC’s XBRL mandate (SEC, 2018), and fair value accounting standard (FASB, 2007). The authors also list risks and obstacles in the financial close process based on the field investigation, some of which are later used in developing the model. Janvrin et al. (2020) also investigate how auditors audit the financial close process in SOX (404b) integrated versus a financial statement audit. The auditors primarily relied on walkthroughs and performed nominal reviews of entity-level controls related to the financial close process. Additionally, the auditors did not test controls in the links between the general ledger and supporting systems, including access controls. In the integrated audits, the auditors relied on these results while performing financial statement audits. However, financial statement-only auditors did reperformance checks on the controls and did not rely on walkthroughs. The authors also discuss the implications of their results. Kwon et al. (2017) use a case study to show the positive effects of automation, redesigning systems, and changing operating processes, among other things, on the financial close process. The practitioner research ( dams, 2002; Hallet, 2002; O’Rour e, 2002; Adler, 2011; Driscoll, 2012; Parcells, 2016) discusses various aspects of the close process, problems, solutions, and benefits. These are mainly based on the authors’ experiences handling the financial close process. The other stream of research comes from consultants and accounting firms specializing in financial close (for example, SGV & Co., 2001; PriceWaterhouseCoopers, 2007; and KPMG and Trintech, 2021). The conclusions in this stream of research are based on personal opinions, Accounting and Management Information Systems 352 Vol. 22, No. 2 field-based observations, and the implementation of specific tools. The primary problems that delay the close process, as identified in this literature, are given below, • Manual systems • Multiple ERP systems • Legacy systems • Inconsistent data definitions • Management problems • Number of consolidating entities • Complex operations, non-value-added activities • Inadequate documentation • Inadequate controls over non-routine transactions • Misstated accruals and estimates • Mismanaged account reconciliations • Excessive reliance on spreadsheets • Shorter reporting deadlines • Unclear roles and responsibilities • Incorrect organizational structure The solutions primarily revolve around having a single ERP instance, automation, software tools, and reengineering accounting/finance processes. The benefits include faster and more reliable financial reporting, simplified processes, and reduced risks such as restatements. Note that these problems and benefits have been identified over a couple of decades. As such, its present relevance remains questionable. The empirical observations from the field are rare. However, the Institute of Management and Administration (IOMA) (2010) report is an exception. This report has the following recommendations for fast close – invest in robust information technology and implement best practices. The report attempts to identify the best practices. IOMA surveyed 180 companies from different sectors and developed benchmarks for closing efficiency and effectiveness, scheduling and timing range for closing activities, and implementation and effectiveness of best practices. The report provides a distribution of the length of the close for a month, quarter, and year, work done on account reconciliations, number of spreadsheets used in the process, use of single or multiple financial systems, and use of best practices such as the use of standard journal entries. Additional information regarding median staff hours to perform the close, median days to perform the annual close by revenue, and the ratio of management to staff hours in the annual close is also provided. We identified four overarching variables: accounting challenges, technological challenges, organizational challenges, and peripheral challenges. We also identified two variables: accounting strengths and technology strengths that may help in the faster annual close. ii Based on the review of prior literature, discussions with industry people, and one co-author’s first-hand experience with German companies, we The Financial Close Process in German Corporations: Developing and Testing a Theoretical Model Vol. 22, No. 2 353 identified numerous issues that can or have the potential to affect the financial close process. These issues were classified into six areas identified earlier. The model is given in Figure 2. iii Figure 2: A Theoretical Model of Challenges and Strengths in the Financial Close Process Accounting and Management Information Systems 360 Vol. 22, No. 2 coent 55 4.109723 1.436366 2.525729 7.31322 Table 5: Pearson Correlation Matrix cannual ac tc orc pc as ts size coent cannual 1.0000 ac 0.2521 1.0000 tc 0.2859 0.6909 1.0000 orc 0.1343 0.5100 0.3486 1.0000 pc -0.0211 0.5815 0.6323 0.4214 1.0000 as -0.1882 -0.0246 0.0111 -0.0046 0.2876 1.0000 ts -0.2378 0.2606 0.3058 0.1314 0.4859 0.6766 1.0000 size 0.2414 0.2624 0.2911 0.2172 0.3550 0.2305 0.3816 1.0000 coent -0.0357 0.2649 0.2943 0.1963 0.3042 0.0363 0.3658 0.5363 1.0000 Tables 6 and 7 report the results of two regression models. In Table 6, we run the regression using only the challenges (accounting, technological, organizational, and peripheral) and using the size and consolidating entities as control variables. The results indicate that the model is significant at a 0.05 level, and R2 is approximately 0.28. The variables technological challenges, peripheral challenges, and size are significant at 0.05 level, and the variable total number of legally independent entities is significant at 0.10 level. The multicollinearity diagnostics indicate that the variance inflation factor (VIF) and related statistics are within acceptable limits. vii Thus, the overall statistics and correlation matrix discussed earlier do not indicate a multicollinearity problem. Table 6: Model 1 – Regression Results Number of observations = 55 F(6, 48) = 2.38 Prob > F = 0.0426 R-squared = 0.2780 Root MSE = 12.423 cannual Coefficient Robust std. error t P>t [95% conf. interval] ac 3.853236 3.674155 1.05 0.300 -3.534148 11.24062 tc 5.42716 2.639308 2.06 0.045* .1204753 10.73385 orc 1.291184 3.071062 0.42 0.676 -4.8836 7.465968 pc -5.470308 2.582832 -2.12 0.039* -10.66344 -.277177 size 2.634948 1.254343 2.10 0.041* .1129232 5.156973 coent -2.644358 1.487046 -1.78 0.082** -5.634264 .3455475 _cons -31.83423 18.305 -1.74 0.088 -68.6389 4.970429 * significant at 0.05 level ** significant at .10 level The Financial Close Process in German Corporations: Developing and Testing a Theoretical Model Vol. 22, No. 2 361 Collinearity Diagnostics Variable VIF SQRT VIF Tolerance R-Squared ac 2.34 1.53 0.4274 0.5726 tc 2.30 1.52 0.4347 0.5653 orc 1.41 1.19 0.7082 0.2918 pc 1.94 1.39 0.5161 0.4839 size 1.49 1.22 0.6698 0.3302 coent 1.45 1.21 0.6880 0.3120 Mean VIF 1.82 Note: We use the robust regression option in all our models. Hence, the absence of adjusted R2. Not using the robust option gives slightly higher values of adjusted R2. The results support all three hypotheses. They indicate that variables technological and peripheral challenges are most influential in explaining the days for the annual close. However, the coefficient of peripheral challenges is negative, indicating that a higher incidence of peripheral challenges reduces the days for annual close. A similar issue came out in the correlation matrix given in Table 5. The control variables size and the total number of legally independent entities are also significant. The sign of size is in the expected direction, but the sign of the total number of legally independent entities is in the opposite direction. We may expect that peripheral challenges and the higher number of consolidating entities will adversely affect the days to close. A likely explanation is that these problems are encountered by larger companies that already have systems and processes to take care of the related issues. The R2 value indicates that the model is a good fit and has significant explanatory power. viii Table 7: Model 2 – Regression Results Number of observations = 55 F(6, 48) = 2.37 Prob > F = 0.0318 R-squared = 0.3634 Root MSE = 11.916 cannual Coefficient Robust std. error t P>t [95% conf. interval] ac 4.076943 3.453587 1.18 0.244 -2.874767 11.02865 tc 5.509701 2.498365 2.21 0.032* .4807536 10.53865 orc .5769209 2.835498 0.20 0.840 -5.13064 6.284482 pc -3.808613 2.365586 -1.61 0.114 -8.570292 .9530655 as 2.519257 3.583226 0.70 0.486 -4.693404 9.731917 ts -8.260629 4.296732 -1.92 0.061** -16.9095 .3882438 size 2.958001 1.165693 2.54 0.015* .6115831 5.304419 coent -1.830719 1.342024 -1.36 0.179 -4.532072 .8706347 Accounting and Management Information Systems 362 Vol. 22, No. 2 cannual Coefficient Robust std. error t P>t [95% conf. interval] _cons -24.87803 19.13846 -1.30 0.200 -63.40176 13.64569 * significant at 0.05 level ** significant at .10 level Collinearity Diagnostics Variable VIF SQRT VIF Tolerance R-Squared ac 2.40 1.55 0.4173 0.5827 tc 2.37 1.54 0.4226 0.5774 orc 1.43 1.20 0.6992 0.3008 pc 2.29 1.51 0.4363 0.5637 as 2.31 1.52 0.4333 0.5667 ts 2.72 1.65 0.3677 0.6323 size 1.57 1.25 0.6388 0.3612 coent 1.65 1.28 0.6066 0.3934 Mean VIF 2.09 In Table 7, we run a regression that includes two additional variables – accounting and technological strengths. The results indicate that the results are significant at 0.05 level, and R2 is approximately 0.36. In this model, technological challenges and size are significant at 0.05 level, and technological strength is significant at 0.10 level. The p-value for variable peripheral challenges slightly exceeds the 0.10 level of significance, and the sign for the coefficient is still negative. Here also, the multicollinearity diagnostics indicate that VIF and the related statistics are within acceptable limits. The results indicate that the variables technological challenges and size are significant at 0.05 level. The newly added variable technological strength is significant at the 0.10 level. However, peripheral challenges and total number of legally independent entities are not significant, but the signs of the coefficients are still negative. We can speculate that technological strengths are indeed effective in countering peripheral problems and a larger number of consolidating entities. Additionally, we only used two questions to measure technological challenges. How technological strengths and weaknesses overlap and interact with other weaknesses will be a productive area of further research. The R2 in this model is even higher, indicating that this line of inquiry has potential. The Financial Close Process in German Corporations: Developing and Testing a Theoretical Model Vol. 22, No. 2 363 4 Effectiveness of best practices to aid in the financial close process The literature prescribes many best practices that enhance the efficiency of the financial close process. In our survey, we asked the respondents to rate the effectiveness of these best practice solutions. The results are summarized in Table 8. Table 8: Effectiveness of Best Practices to Aid in the Financial Close Process Effectiveness of best practice solutions for accounting-specific challenges Very low effectiveness Low effectiveness Moderate effectiveness High effectiveness Very high effectiveness Standardization of accounting procedures with a common chart of accounts (CCoA) 0.0% 12.7% 41.8% 29.1% 16.4% Simplification of the common chart of accounts (CCoA) 1.8% 18.2% 34.5% 32.7% 12.7% Standardizing of collecting, presenting, and measuring transaction information 1.8% 9.1% 30.9% 40.0% 18.2% Structured process for subsequent adjustments (based on the materiality concept) 3.6% 10.9% 30.9% 41.8% 12.7% Regular close (usually monthly) of subledgers and journals that feed data for the general ledger 1.8% 10.9% 34.5% 43.6% 9.1% Reconciliations of subledgers to general ledgers or intercompany transactions are performed on a continuous basis and not at the end of the period 1.8% 3.6% 45.5% 36.4% 12.7% Create automated entries for depreciation/amortization, accruals, and provisions 3.6% 16.4% 36.4% 27.3% 16.4% Minimize complex calculations for provisions and inventory measurement during the year 1.8% 14.5% 40.0% 27.3% 16.4% Minimize manual data entry 0.0% 16.4% 34.5% 29.1% 20.0% Accounting and Management Information Systems 364 Vol. 22, No. 2 Effectiveness of best practice solutions for technological challenges Very low effectiveness Low effectiveness Moderate effectiveness High effectiveness Very high effectiveness Powerful consolidation system for integrated financial consolidation purposes (in terms of matrix consolidation) 1.8% 7.3% 40.0% 40.0% 10.9% Organization is standardized on ERP level (template or ONE ERP approach) 1.8% 12.7% 38.2% 32.7% 14.5% New media and tools (e.g., artificial intelligence, machine learning, process automation with robotics) are broadly used 10.9% 23.6% 29.1% 20.0% 16.4% Effectiveness of best practice solutions for organizational challenges Very low effectiveness Low effectiveness Moderate effectiveness High effectiveness Very high effectiveness Establish clear responsibility for closing tasks in a closing schedule 3.6% 12.7% 23.6% 34.5% 25.5% Establish adherence to deadlines 0.0% 9.1% 25.5% 40.0% 25.5% Establishment of clear and regular communication 1.8% 5.5% 27.3% 45.5% 20.0% Document your closing process 1.8% 12.7% 32.7% 45.5% 7.3% Assign responsibility for resolving discrepancies (intercompany reconciliation) 1.8% 7.3% 29.1% 49.1% 12.7% Develop cross-departmental collaboration to solve recurring cross-functional problems (in the sense of end-to-end) 1.8% 7.3% 32.7% 38.2% 20.0% The Financial Close Process in German Corporations: Developing and Testing a Theoretical Model Vol. 22, No. 2 365 Effectiveness of best practice solutions for organizational challenges Very low effectiveness Low effectiveness Moderate effectiveness High effectiveness Very high effectiveness Introduction and monitoring of key performance indicators in relation to the closing process 3.6% 14.5% 29.1% 50.9% 1.8% Approval processes are automated 5.5% 14.5% 27.3% 34.5% 18.2% Key performance indicators are standardized 1.8% 10.9% 30.9% 41.8% 14.5% Distribution of key performance indicators to line managers in real time 1.8% 18.2% 32.7% 29.1% 18.2% Effectiveness of best practice solutions for peripheral challenges Very low effectiveness Low effectiveness Moderate effectiveness High effectiveness Very high effectiveness Reduction of investigation levels 3.6% 14.5% 40.0% 32.7% 9.1% Move routine work (non-critical activities) out of the closing crunch 1.8% 7.3% 38.2% 32.7% 20.0% Prepare forms (e.g., checklists) in advance 1.8% 16.4% 29.1% 40.0% 12.7% Pare down the content of reports 1.8% 14.5% 41.8% 38.2% 3.6% Use of accruals and estimates to shorten close 3.6% 7.3% 41.8% 41.8% 5.5% Input all recurring journal entries (such as accruals, depreciation/amortization, allocations) at one time 3.6% 10.9% 32.7% 41.8% 10.9% Cross-functional personnel in accounting 3.6% 10.9% 32.7% 34.5% 18.2% Accounting and Management Information Systems 366 Vol. 22, No. 2 In Panel A, best practices for accounting-specific challenges are described. These practices are primarily under direct control by the accounting/finance departments. Overall, at least 80% of the respondents rate all the best practice solutions as having a moderate or higher level of effectiveness. The top three procedures rated highly by the respondents in the ranked order are, • Reconciliations of subledgers to general ledgers or intercompany transactions are performed on a continuous basis and not at the end of the period • Standardizing of collecting, presenting, and measuring transaction information • Standardization of accounting procedures with a common chart of accounts If we only count high to very high effectiveness, then the two procedures: a structured process for subsequent adjustments (based on the materiality concept) and regular close (usually monthly) of subledgers and journals that feed data for the general ledger, are also important. In Panel B, best practice solutions for technological challenges are described. There are only three items. The first two items, a powerful consolidation system for integrated financial consolidation purposes and an organization standardized on ERP level, are considered moderately to very highly effective by more than 85% of the respondents. The third item, the use of artificial intelligence and machine learning, is not viewed favorably, perhaps because these technologies are not as yet widely used in the financial close process. In Panel C, best practice solutions for organizational challenges are described. The top four procedures ix , in ranked order, considered moderately to very highly effective, are given below. • Establishment of clear and regular communication • Establish adherence to deadlines • Assign responsibility for resolving discrepancies (intercompany reconciliation) • Develop cross-departmental collaboration to solve recurring cross-functional problems In Panel D, best practice solutions for peripheral challenges are described. These overlap with accounting challenges to some extent but are more related to workflows and processes. The top three items considered moderately to highly effective in the ranked order are x , • Move routine work (non-critical activities) out of the closing crunch • Prepare forms (e.g., checklists) in advance • Input all recurring journal entries at one time • Cross-functional personnel in accounting The Financial Close Process in German Corporations: Developing and Testing a Theoretical Model Vol. 22, No. 2 367 The primary issues identified by the survey respondents revolve around reconciliations, standardization of workflows, communication, and cross-training. On the technology side, a powerful consolidation system and one ERP system are considered critical to the financial close process. This provides evidence that the best practices described and prescribed in the literature are indeed effective in the field. 5. Conclusions This paper plans to investigate the variables that affect the days required for the financial close. We identified six variables – accounting challenges, technology challenges, organizational challenges, peripheral challenges, accounting strengths, and technology strengths. We used a survey instrument consisting of a series of questions to measure these variables. The secondary purpose was to identify the best practices that are most effective in the financial close process, according to our respondents. We run two regression models: one with the challenges and the other with challenges and strengths. Given the paucity of research in this area, we consider this a pioneering study. The results indicate that the variables have significant explanatory power, the R2 in the first regression is 0.28, and the second regression is 0.36. Such large R2 values suggest that the model developed in this study has potential. The technological challenges and technological strengths emerge to be the two most important variables that affect the days to close. The peripheral challenges and the number of consolidating entities have a counterintuitive result; those variables are negatively related to the days to close. There is an interplay between these variables and technology, which may affect the accounting and organizational workflows. This needs further investigation. Also, size was significantly positively associated with days to close. We also asked the respondents regarding their perception of best practices that are effective in the financial close process. The most critical accounting best practices are related to timely reconciliations, standardization of accounting processes, and common chart of accounts. On the technology side, we discovered that one ERP system and powerful consolidation tools are valued. In the case of the organizational side, clear communication, adherence to deadlines, assigning responsibility for reconciliations, and cross-departmental collaboration were considered the most effective. The answers to peripheral challenges are mostly related to the standardization of accounting functions and cross-functional training. These findings provide some basis for identifying effective best practices as opposed to prescriptive research of the past. We also asked the respondents whether they thought the days to close were appropriate. Out of 55 respondents, 46 (83.6%) considered the days to close to be Accounting and Management Information Systems 368 Vol. 22, No. 2 appropriate. The conclusion did not differ among small, medium, or large-sized corporations. We can conclude that a vast majority of the companies are not working on reducing the days to close. Apparently, the trade-off between time and the quality of the financial information is deemed acceptable. These findings will be valuable to managers, consultants, and vendors involved in the financial close process. The contributions of this paper to the literature can be identified as follows. We develop a first theoretical model for the financial close process based on academic and practitioner research. We collect data and empirically test this model; data collection in this area has been a bottleneck in testing theories. The model indicates a high explanatory power indicating that our research has further potential. The technological abilities of the organizations are the most significant determinants of the days required for the financial close process. This finding indicates that digitization and automation of the different workflows may lead to the shortening of the days for the financial close. We also identified the critical best practices in the accounting and technology areas based on the practitioners’ opinions. The rankordered best practices should provide guidance to the consultants and accountants. These findings will also provide the basis for further research. Our research has limitations. First, this research is subject to the standard limitations of survey research. Second, the sample is not large. Given the problems in collecting data in this area, increasing the sample size poses a problem. Third, a larger sample size would have allowed us to use different statistical techniques, such as factor analysis or structural equation modeling, allowing for a better classification of underlying constructs. Finally, this research is confined to a sample of German companies and needs further validation in the global context. References Adams B. (2002) “Creating value with an instant close”, Strategic Finance, vol. 9:49. Adler, J. (2011) “Closing the loop on the closing the books”, Strategic Finance, July, 43-47. Berinato, S. (2001) “What Went Wrong at CISCO?” CIO, August, 52-58. Bragg, S. M. 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