BI Forum 2012 - Continuous Monitoring for Risk & Performance

Continuous Monitoring
for
Risk & Performance

Finance perspective

Jan Hurda - Consider Solutions

15th November 2012

© 2012 Consider Solutions All rights reserved. Do not distribute without permission

Agenda
• Introduction
• Risk & Control – Prevention & Detection
• Specific Exception Analytic Examples
• Critical Success Factors
• Questions

© 2012 Consider Solutions. All rights reserved. Do not distribute without permission

The CFO Office . . .
• World Class Finance
– Leading companies’ finance functions cost approaches 0.5% of
revenue
• Stewardship & Reporting
• Accounting & Finance Operations
• Business & Management Support

• Four Pillars of Financial Management:
– Efficiency: continually improve process efficiency, speed, and quality
– Effectiveness: deliver expertise in financial stewardship and risk
management
– Relevance: provide analytical support that decision-makers need
– Influence: proactively drive the business toward superior outcomes

• Risk and Performance
Courtesy: Hackett Group, CIMA/CGMA, CFO magazine


Prevention & Detection


But it’s not ‘Big Brother’
• We live in a complex fast-moving business
world
• We have global processes and organizations
• We have integrated systems
• No one person sees the end to end process in
detail
• Mistakes, errors & misunderstandings happen
• Identifying, understanding, diagnosing and
improving is what management is about
• Judgement still matters


Exceptions impact risk AND
performance

Processes are ignored Policies cannot be cost-effectively
or circumvented enforced

What is supposed to happen?

What actually does happen?
Performance Impact
Fraud & Inappropriate Inaccurate Unnecessary Transaction Audit/Compliance
Waste Payments Financials Risk Costs Costs


Systems, Controls & Risk

• We invest heavily in commons systems
to drive:
– Process standardisation
– Business efficiency
– Economies of scale

• But do we get . . .

– A standard business process?
OR
– A standard data input process?


Standardized process
control
ERP is configured to only allow GR if PO exists, however…

1. Truck drops off shipment, but no PO exists

2. Warehouse worker calls up purchasing to create a PO

3. GR is created against PO

“The myth of automated controls in systems”


Multiple Dimensions

• What to Monitor & Why?
• If exceptions are found who needs to know? Who owns it?
Who will do something about it?
• What are the exception criteria?
• What information do we need to identify and describe
exceptions?
• Any scenarios to exclude?
• How to present and deliver results in meaningful way?
• How often to monitor and what periods to monitor?
• What actions to take?


What to Monitor

• Inputs ...
– Finance Management Consultation
• What are finance leadership concerned about in context
of financial processes
• Where is there limited visibility?
• What data is needed to drive continuous improvement?
– Industry Benchmarks & Best Practice
• e.g. error rates ...
• Duplicate invoices / duplicate payments – 0.1 to 0.5%
of annual invoice payments
– Regulation
• What must / must not happen within our business and
processes to ensure compliance with prevailing
regulations


What to Monitor

• Compliance
– e.g., Suspicious or proscribed payments (FCPA/OFAC)

• Risk
– e.g., Unbilled Revenue
– Duplicate Payments
– Payment to One Time Suppliers

• Performance
– Driving simplification & standardisation
– e.g., Ensuring agreed payment terms are used –
payment periods / discount terms


Examples ...
Procurement:
– Duplicate Payments
Sales:
– Goods delivered without a PO – Price Reductions
– Non-standard payment terms – Undelivered orders
– Invoice value greater than goods received – Exceptional customer credits/returns
– Duplicate Invoices – Payment terms

Fixed Assets: Travel Expenses:
– Inappropriate asset depreciation – Duplicate claims
periods
– Ineligible items claims
– Misclassified capital equipment

General Ledger:
– JE postings into prior periods already closed
– Unusually large JEs
– Manual payments


Exception Criteria? Example

• Example:
– Procurement: Non Standard Payment Terms
– Business Criteria:
• Identify any Purchase Orders where the Payment Terms
used are not the standard payment terms agreed with
the vendor.
– Business Rationale:
• Purchase orders that do not follow agreed terms can
have an adverse affect on cash outflow and working
capital. May also lead to problems with vendor
relationships and corporate image and reputation.
Excessively short payment terms may indicate
potentially inappropriate relationships. Excessively long
terms may indicate future period commitments. Lack of
standardization impacts cost of finance function



• Example:
– Procurement: Invoice greater than Goods Received
• Invoice quantity greater than goods receipt quantity
means the vendor has over billed which may lead to
excess payments and cash flow issues.
• Prevent excess inventory carrying cost and reduce 3-
way matching errors by monitoring cases where Goods
Receipt quantity is greater than Invoice Receipt
quantity.



• Example:
– Procurement: Duplicate Invoices
• Duplicate invoices may result in inflated purchases or
excess payments to vendor. Such invoices may lead to
financial losses and affect cash outflow and working
capital.
• To ensure that Invoice is recorded only once to avoid
duplicate payments or inflated purchases.


Priorities – Value at Stake

Europe Europe
Americas Americas
Asia Asia
MEA MEA

Europe
Americas Europe
Asia Americas
Asia


Exceptions, Root Causes &
Actions
• Is an Exception ... & indicates failure of process or
control. Review process / policy/ control / training to
address risk. Continue to monitor.
• Is an Exception ... & indicates inappropriate activity.
Take remedial action. Continue to monitor.
• Is an Exception ... & indicates human error. Review
integrity checks / training needs. Continue ...
• Is NOT a material Exception. Review / modify exception
/ exclusion criteria to exclude given scenario(s).


CM Best Practices
• A clear business objective
• Start simple with a narrow path scope
• Prioritize based on impact and relevance
• Iterative refinement of process and scope. define ...
analyze ... learn ... review ... refine ... extend.
• Review current practices at all stages. Is there a better
way, can we re-engineer our thinking?
• Take the opportunity to engage & connect to help drive
partnership with your business units
• Focus on performance improvement opportunities as
well as risk assurance
• Embed exception thinking in the organization


Balanced Skillsets Required
• Business process understanding & analysis
• Business risk and performance facilitation
• Data and system process knowledge
• Technical data filtering & analysis skills
• CM technology understanding
• Business rules/filter logical design skills
• Business analysis of exception impact
• Diagnosis & root cause analysis
• Continuous improvement/change management


Critical Success Factors:
Speed & Results
• Continuous Monitoring and Analytics are receiving
more and more attention from the finance, risk,
compliance, audit (and vendor) communities.
• Beware ‘strategic’ a.k.a. ‘slow and costly’
• This is not an IT strategy
• Identifying and managing exceptions should
already be a key focus for management
• Rapid results are not only possible, but critical !
• Monitor only what matters – what decisions will
we make based on exceptions identified?


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