May 17, 2007

Towards Global Chart of Accounts (Global CoA)

Introduction
While setting up a global chart of accounts is a very beneficial objective for most of the organization, more often than not, it remains at at the stage of wishful thinking or ambition. Organizations bravely undertaking this virtuous objective often find themselves faced with gargantuan obstacles and tend to lose heart and give up in the formative stages of this exercise and decide to live with 'As Is'. The primary obstacle is the multifarious accounting conventions and taxation considerations in the various countries that they do business in.
However those organizations which persevere with this exercise and completes it reap rich rewards. The most obvious benefit of undertaking this exercise is the vastly expanded knowledge it provides to the organization about its processes. Companies often are surprised to find many common processes that were till then considered 'country specific'. This helps them to integrate processes across the organization in a more efficient way. Another benefit is that this exercise helps them rationalize their country specific processes. Some of the country specific regulations have become out dated and so have those country specific custom processes designed to meet these regulatory requirements. For instance, as India moves to a uniform GST, most of the India specific localizations that were catering to the India taxation regime will need to be removed, rewritten or relooked into. In this case for example, the separate GL nominal accounts created for meeting India specific processes become redundant as the Indian Taxation Regime smoothly integrates into the global taxation practices.
In the light of the above, this article attempts to provide a set of guidelines to the implementation team as they move towards designing a global chart of accounts. It starts by analysing the changing global business landscape that makes global CoA a necessity rather than a virtue. Next it identifies the common road blocks in the path to creating a Global Chart of Accounts and goes on to list down the benefits and drawbacks of a global CoA. The article concludes by providing a set of key implemenation considerations that could help the organizations as they decide to go through with this exercise.
Changes in Business LandscapeOver the last 20 years or so, the global business landscape has undergone tremendous changes. These have been catalysed by the phenomenal global economic growth, the rapid advent of IT that has eliminated the distance between countries and made 24*7 operations a normal scenario, and commoditization of ERP to name a few. Given below are a list of some of the key changes to the business global landscape that necessitates the introduction of 'Global Chart of Accounts' (Global CoA).
1. Globalization and IntegrationThis has been the lingering theme of the last 20 years or so. As globalization and the concommitent business integration marches on, the multinational organizations are faced with new and complex business processes and corresponding accounting challenges. For example, it is almost normal for an Indian company doing business in China, procuring its supplies from a german supplier and consolidating its payables in Indian Rupee. Here the challenges to payable accounting, inventory valuation and treasury management brings in complexities related to accounting conventions and methods followed in different countries.
2. Shared services becoming a norm rather than exception
As the global distances gets shorter, it has become a normal practice for organizations to pool and manage their operations like payables and receivables management from a shared service center located in a low cost country with requisite skill sets. Usually a single team in this country handles the operations of units located in different countries. In this situation, having multiple CoAs for different country operation could become a serious bottleneck.
3. Maturity of ERP Implementations
Over the last ten years or so, ERP has evolved as a major catalyst for organizations to standardize their processes. By forcing the organizations to take a hard look at their business processes, ERP has enabled the organizations to be aware of and bring out standard processes across their business units. The inflexibility of ERP has forced organizations to standardize their business processes in some cases. The realization is slowly dawning that while the process have standardized in most cases, the nature of accounting those processes is yet to catch up.
4. Dependence on WEB - Need for a single internal view of the organization While there are many benefits of Internet, the less talked about is the single view it has brought to the organization about its business. In the pre web period, the HQ of an organization has to wait a month to receive a few handpicked reports from its different international units to get a picture of the health of the organization. The advent of web has changed all that. Now the CFO sitting in Mumbai can receive real time reports of its Chinese, US and German operations on his laptop at the click of a mouse!!. In this scenario, it makes sense for the organization to have a single Global CoA for the CFO to make sense of those multifarious reports.
5. Increase in quantity and quality of M&AsOrganizations growing through M&As find that the major challenge in the exercise is standardization of the processes by combining the best practices followed by the two organizations. Many a times they find a significant difference in the way they account similar transactions. One of the ways in which they try to bring about integration is by using common ERP systems. As discussed previously, a common ERP provides optimal results through process and accounting standardization.
6. New category of accounts created by ERP - Contra Accounts / Intercompany accounts / Cash Clearing accounts etcThis is one instance where ERP and not the business is the key reason for demanding Global CoA. Firms implementing ERP find exposed to a new group of accounts which is not presently available in their existing CoA. ERP expects these Contra accounts to be set up for all the implementing units. In many cases these accounts could hold significant balances and will require close monitoring and control. As most of these accounts are balance sheet account, their impact will not be immediatly felt in the P&L focussed analysis. Creation of these accounts is another reason for organizations to go for Global CoA.
However, be careful with Global CoA
While Global CoA is definitely a worthy objective, it is not very easy to achieve. In many cases organizations would have spent considerable amount of organizational time and resources in designing the present structure. Since the current CoA is designed with organizational requirement in mind, it is better to tread with caution while moving over to Global CoA. The consultant should take pains to understand the detailed design considerations behind the current CoA. He/She should put in place a clear cut stakeholder expectation management strategy while embarking on this exercise. All the stakeholders including Users, Management, External Auditors, Board and the Shareholders are comfortable with the present method of financial accounting and might not want to upset the applecart.
The strongest argument in favour of Global CoA is the change in global business landscape discussed earlier. It is possible that sooner rather than later, the organization will need to react to the changes. As they say 'it is better to prevent and prepare than repent and repair'.
Another argument is the creation of new set of contra accounts to meet ERP requirements and the concommittent control requirements.
Some of the arguments in favour of maintaining the status quo are as follows.
1. Significant customization in the current designIf the current system consists of a number of inbound and outbound data to and from the GL, the implementation of Global CoA will call for a detailed review of all these customizations. In that one of the main triggers of implementing Global CoA is planned ERP implementation, this will be a beneficial exercise since it helps to evaluate each interface with a view to retaining or discarding the same. However Global CoA will call for modifying most of these customizations.
2. Significant consolidation requirements
Firms using third party applications like Hyperion for consolidation will need to rewrite a number of account mapping rules prior to using Global CoA. Consultant will have to redesign these rules and get management sign off before commencing the process of implementing Global CoA.
3. Sensitivity of data.Since the financial data is very sensitive to the organization, there will be a fear that the introduction of the new CoA could bring in increased number of accounting errors and finally could affect the financial reporting. Often this argument is proffered by a senior member of the organization who has been a part of failed ERP implementation in the past. The way to handle this is to do a thorough planning and design a pilot / prototype and get an organizational sign off.
4. Significant Local Exceptions
If the organization has operations in different countries with different statutory requirements, it could have an impact on the Global CoA. This requirement calls for creation of a set of country specific nominal accounts to handle the different tax regimes and hence may not be amenable to Global CoA. The challenge is to integrate the local tax accounts to the Global CoA.
However, the plus side is that as discussed earlier, the introduction of Global CoA provides an opportunity for the organizations review their country specific taxation processes. Many a time, they are able to rationalize the localization processes and reports thereby reaping significant scale advantage.
5. Intensity of training requirements
One of the key challenges in bringing out Global CoA is the intensity of training involved in rolling out the CoA across multiple units. This is all the more daunting if different units had different coding conventions in the past. For example the Hungary Operations may have their asset codes starting with 1, the Owner's equity starting with 2 and Liability starting with 3. However the UK unit will have a convention where liability accounts start with 1, assets start with 2 and revenue starting with 3. It is a serious training challenges to make all these units get accustomed to the Global CoA.
Major challenge no doubt. It is challenges like these that make the whole exercise worthwhile.
6. Different accounting conventions followed
This is another case where the difference in accounting conventions call for different accounts. Typical example is the way different countries handle inventory accounting. While ERP directly debits the asset account on purchase receipt, many countries requires the organization to debit the P&L and reflect the asset impact at the period end.
Looked at it closely, this is more of an argument for / against the process rather than the Global CoA. Isn't it?
Design Considerations
An impending ERP implementation can act as a catalyst in the organizations move to Global CoA. As a part of the ERP implementation the organization undertakes a detailed analysis to understand the process fit to ERP. This is the ideal time to initiate the process of Global CoA. For one, the organization is ready for a change. Additionally, there are a number of features in ERP which makes it easy to transition to Global CoA. Some of the points which facilitate a Global CoA during ERP implementation are as follows.
1. Additional best of breed features in ERP: There are various features in ERP which can make your transition to Global CoA necessary as well as smooth. One such feature in Oracle Applications is the concept of Set of books. As the name suggests the SOB can handle multiple books. This feature allows you to use the single CoA across multiple instances / implementation. This is a strong argument for a Global CoA.
2. Parent Child Hierarchy: Another feature is the concept of parent child hierarchy for reporting purposes. Most of the ERPs allows you to group your child accounts under different parent groups for reporting purposes. Since each child can be grouped under different parents for different reports, you need to use only one CoA for most of your reporting purposes. Of course, your parent child hierarchy will need effective design and constant monitoring.
3. Flexibility & scalability: It is a good idea to define a superset of the accounts in your organization which will include the normal account codes as well as country specific account codes. Having decided this, use the security rules provided in the package to ensure access control ensure the relevant user - account matrix. This will ensure each user group accesses only the account codes relevant to their unit. This control is required from the statutory requirmens such as SOX. Such security features are common for most of the ERPs.
One of the key considerations is scalability and upward compatibility. Ensure that the length of the account code is designed to handle future requirements. For example a 4 digit code, limits to your account number to a maximum of 9999. This may not meet the design criteria of scalability. Normally it is preferable to have 6 digits for an account number.
Additionally ensure to provide sufficient enough gaps between various groups so that additional account numbers can be inserted into the account group in future. For example, if, at present, your fixed asset account numbers are 666101 to 660120 (20 Nominals), you could start the current asset codes from 660151. This leaves 30 nominals for future purposes.
Another aspect of scalability relates to the future growth plans of the organization. If the organization is planning an inorganic growth strategy, the CoA should have the scale to handle the future M&A activities and the incorporation of the new companies into the existing CoA.
4. Create a team of COA Ambassadors: As discussed previously, the process of changing CoA is very sensitive and is fraught with many an obstacles. It is very important to have a team of CoA Champions from the customer organization who can own and implement the solution across organization. Their primary role will include coordinating the design of Global CoA, Concept Selling, providing execution support to the rollouts of Global CoA, planning the transition plan, coordinating the security, access and consolidation activities and finally to 'soothe the nerves' at different levels of organization.
5. Direct from the top: From the perspective of Finance department, this could be the most important initiative which can impact the future finance road map of the organization. It is very important that this initiative be owned and supported at the CFO level. This is not a transactional initiative. Through Global CoA you are attempting to integrate the finance processes and reports and it is imperative that this exercise be directed from top level in the organization.
Benefits1. 'One View' of organization
2. Easy MIS reporting : Quick and easily understandable reporting
3. Quick consolidation - No fancy account mapping rules required.
4. Better management control throughout the life cycle of the chart of accounts
5. Process standardization should follow from CoA standardization.

Drawbacks
Excessive standardization:
This could lead to lowering of the depth and breadth of the country specific data. Some of the taxation accounts are Balance Sheet accounts and hence are not as closely monitored as P&L Accounts. Chance of surprises could not be underestimated.
Need for close monitoring and tracking. The use / misuse of the new accounting codes due to unfamiliarity in the early phase of implementation calls for intensive training and handholding in the initial stages and an extended, process driven monitoring and tracking for a significant period of time.

ConclusionAs the organization prepare for its ERP implementation, it is a beneficial exercise to conduct a detailed review of the current chart of accounts. The review should include environmental analysis focusing on your industry trends, the industry future direction and your company’s current position and the aspired position in your industry. The other aspects to be considered include the current CoA dimensions and the future MIS requirements. The whole exercise is to be considered as a sub project within the scope of the ERP implementation and need to be handled by a team of domain specialists with support from the ERP consultants.
This exercise, if properly done, can reap rich dividend for the organization including a clear understanding of the future road map of the organization, thorough knowledge of the current accounting principles, processes, policies and standards (3PS) and lead to rationalization of these. The end result is a tightly knit organization flexible enough to handle local accounting exceptions.

3 comments:

sridhar said...

Hi Ramaswamy,

WOnderful and informative article for all Oracle Financial Consultants and key business users.

I should have read this 4 years back(lol) in 2007.

Thanks,
Sridhar.V
ERP-Head Finance.

Recovering Sugar Addict said...

I plan to use this to convince management to move to a global CoA as we bring on several new locations related to a merger as well as rolling in two locations from acquisitions that require localizations. It's gonna be complicated but if we don't do it right to start with, it'll be a mess later! Thanks for documenting it for me!

Ramaswamy VK said...

Hello Recovering Sugar Addict:
Thanks for this post. I am very keen to know your progress and will be very happy to help you if you need. Pl. note that while design should consider global requirements, execution can be at the local level. Also, since the localization requirements change gradually (I wrote this article 2 years back, till now India has not moved to GST), the transition to Global CoA can be very slow.