Record to Report (R2R)
UNIT 8 CONTROLS AND METRICS IN R2R
Structure
8.0 Objectives
8.1 Introduction–Controls & Metrics in R2R
8.2 Overview of Errors
8.3 Controls in R2R
8.4 Metrics for R2R
8.5 Let Us Sum Up
8.6 Key Words
8.7 Answers to Check Your Progress
8.8 Terminal Questions
8.0 OBJECTIVES
After studying this unit, learner should be able to understand and appreciate the
following: -
x kind of Errors in R2R;
x controls in R2R to prevent the errors; and
x metrics for R2R.
8.1 INTRODUCTION - CONTROLS & METRICS IN
R2R
The role and importance of R2R would have become amply clear to you by now.
Considering the impact of R2R on the success and failure of an organisation, it is
important to ensure that there are adequate controls in place. Controls are a
requirement not only from a statutory and regulatory perspective (be it the Sarbanes
Oxley Act or the Securities Act in the US or the Companies Act in India) but also
from an ethical perspective.
The type and level of controls in R2R can be understood by the kind of errors that
can be committed while the R2R process is conducted. In case the recording and
reporting are completely error free then we can say that the control environment
of an organisation is strong. So to understand controls better we should examine
the kind of errors a business could be committing.
8.2 OVERVIEW OF ERRORS
From an accounting point of view, the chances of errors are high in the following
situations: -
a) While processing bulk entries- these could be both high value and/or high
138 volume.
b) While processing entries that have a major impact on Balance Sheet and P&L. Controls and Metrics
in R2R
c) While processing a wide range of entries. As the variety of entries increase,
the organisation has a challenge to make the processor understand the business
impact of these entries.
d) Lastly errors happen when there are large requests for entries to be passed
especially around the month end.
Errors can be broadly classified into three categories which are as follows:
1. Timeliness Errors
2. Accuracy Errors
3. Other Errors
1. Timeliness errors could be as follows:-
a) Not processing at all- Request completely missed. That implies that the
entry was not posted at all. This is a rare situation but possible.
b) The second is where there is a delay in processing the entries. This implies
that we have missed the TAT.
c) The third situation is where we are processing less than the requirement.
This means that instead of 500 per head, we could only process 357 due to
some reason as lower productivity than that committed or slow system
speed.
2. Accuracy Errors: Some of the major accuracy errors are as follows:-
a) Keying In errors: this is where the person entering into the system could
have made an data entry error.
b) Principal Mistakes: would mean an accounting entry error such as Capital
vs. Revenue. So for instance, if it is an Asset purchase but we debit it to
Expense, we end up with a Principal Error that has an immediate hit to the
P&L
c) Reference field left blank where a reference field is left blank, that is not
entered or it is wrongly entered. This may adversely affect the usefulness
of that information while doing analysis.
d) Communication error: When things are not communicated correctly. Say
if there is a standing instructions that was given once and needs to be revoked
has not been done so e.g. Rent provision continues despite lease being
terminated
3. Other Errors: In this category we have errors arising more from operations
than anything else. Some of these are as follows:
a) Improper Archiving for future reference: Sometimes we do not have a
systematic mechanism for the storage of documents and their retrieval at a
later point of time in the future becomes very difficult.
b) Incomplete supporting documentation: At the time of the entry the
supporting documentation was either not received or it was not filled properly.
This normally results in having a problem at a future point of time.
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Record to Report (R2R) c) Improper / No Authorization: In a global world where organisations span
across the globe it is very important to get the proper authorization before
execution of any entry or transactions. For example, the Finance Controller in
the Malaysian unit of the company can’t approve an expense charge of UK.
d) Manual Standing Instructions were not stopped or changed when they
should have. You may give an instruction to execute something at the
beginning of this financial year (say 2018) which is applicable for this
financial year. You may forget to revoke it in 2019 and it may get executed
causing an error.
Each of these errors causes problems in the financial book keeping system
of the client. These can lead to downstream delays and errors or it could
cause wrong Income Statement (P&L) or wrong Position Statement (Balance
Sheet). All this could lead to having adverse audit comments and
embarrassment and loss of faith with the client.
Having listed some of the errors that could cause problems for
reporting and recording, let us look at the controls that could
help prevent such errors and defects.
8.3 CONTROLS IN R2R
While some controls are generic and a must for all the R2R activities, there are
some which are specific to each of the R2R processes like Transaction Processing
or Reconciliations or Fixed Asset Accounting etc. Lets discuss some generic
controls first:
1) Standardization of systems- Many a time multiple systems are used causing
system interface issues. As far as possible, an organisation must ensure use
of same accounting and financial systems within its various units and
functions.
2) Proper work planning- The work load should not be skewed at the end
of any month to reduce the chances of errors that might occur while
processing bulk entries.
3) Seamless system support- Systems should be maintained to ensure proper
speed at all times. This will ensure timely processing of entries.
4) Proper hiring- It must be ensured that people who are to perform the R2R
role have adequate knowledge and experience. The criteria for hiring an
R2R person are higher than that for hiring a person for a P2P or O2C role.
5) Adequate process and systems training: Lack of proper process training
is a very important reason of errors to occur. It must be ensured that the
R2R team is adequately trained to discharge its responsibilities efficiently
and accurately.
6) Complete Desk Instructions / Standard Operating Procedures- Desk
Instructions are a set of instructions which are given to every process associate
informing him about the steps of execution of the job that he has to perform.
Incomplete desk instructions and procedures are also another major reason
140 for errors.
7) Complete policy manual- The organisation must ensure that there are Controls and Metrics
accounting policies for each of the major items impacting the P&L and in R2R
Balance Sheet like Fixed Assets, Depreciation, Re-imbursements, Inventory,
Inter-company, foreign exchange transactions etc.
8) Awareness of the downstream impacts- It is very important for a person
performing the R2R role to work with an End-to-end perspective. While
processing a transaction, he/she must understand what would be the impact
of error on the P&L and/or Balance Sheet as well as on the customer.
9) Proper quality checks- Quality parameters should be laid down clearly for
the R2R team to follow them at all times of recording and reporting.
10) Proper documentation and archiving procedures- The organisation must
have proper procedures like referencing and coding to enable documentation
and archiving as well as future reference. People must be trained to follow
them meticulously.
Specific controls:
1) Transaction processing and Month-end reporting
1.1 Timely requests from the business to the R2R team for processing the
transaction- Timelines should be laid down for various teams to follow.
For example in case P2P wants to send a request to pass accrual JV to
book the liability and record the purchase, it must do it 3 days before
the month end.
1.2 Proper effort planning in the Transaction Processing team- it must be
ensured that there are enough team members in the transaction
processing team at all times, particularly towards the month-end.
Proper back-up planning to meet attrition and other challenges must
be in place.
1.3 Month-end calendar, templates and trackers- must be developed and
the teams must be trained on their proper use.
1.4 Specific team must take care of inter-company [Link] team
should be trained on inter-company policy and use of inter-company
calendar and other templates and trackers.
1.5 Perform a soft close- A soft close is a simulation of a proper period
close. It is good practice to ensure discipline during non-quarter end
months. Besides, it provides an opportunity for identifying and
eliminating defects before the crucial quarter/year [Link] materiality
thresholds are adjusted and analysis performed is less. Only some
critical reconciliations and adjustments are performed.
2) Reconciliation
2.1 Frequency of reconciliation for the different types of reconciliations
must be determined, For example a Bank or AP or AR reconciliation
must be prepared every month, Fixed Asset reconciliation every
quarter, and so on,
2.2 There should be division of work between accounting and reconciling.
Besides, the person preparing the reconciliation must not review it.
There should be strict authorizations for write-offs. 141
Record to Report (R2R) 2.3 Master Data Maintenance Responsibility and timelines must be
assigned for the closure of unreconciled items. There should be an
open item MIS and closure procedure including calls, mails and
escalations.
2.4 There should standardized reconciliation templates.
2.5 Reconciliation guidelines/parameters must be clearly defined.
3) Master records for GL accounts must be complete and accurate. They
must be updated at all times.
3.1 Access controls- The person maintaining the masters must not be
allowed to record transactions.
4) Fixed Asset Accounting- some major risks to Fixed assets include risk
of overspending, unauthorized purchase and sale, incorrect
capitalization, mismatch between General ledger and Fixed Asset
Register, incorrect depreciation, physical loss of assets. To mitigate these
risks the following controls are required:
4.1 All purchases must be made against budgets and through a proper
procedure. Indents should be prepared on the basis of budgets. Purchase
orders must be duly authorized and must be on the basis of the relevant
indent. When the invoice is received, it should be mapped with the
relevant purchase order.
4.2 There should be appropriate authorizations and support documen-
tation at every stage- capitalization, revaluation and disposal of Fixed
Assets.
4.3 Certification on Work-in-Progress (WIP) that assets are ready for use
or still in Construction stage- with reference to supporting documents
such as contractor’s bills, work orders, independent confirmation of
the work performed from other parties.
4.4 Quality Check on all asset related transactions
4.5 There should be regular schedule based reconciliations for fixed assets.
There should be an analysis of any major variance of amount from
the past period(s)
4.6 There should be physical access controls
4.7 There must be a periodic verification of assets
4.8 The assets must be adequately insured
Check Your Progress A
1. Fill in the blanks:
a) The type and level of controls in R2R can be understood by the kind
of............................
b) In order to control overspending, all purchases must be
within.....................
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c) As a reconciliation control, responsibility and timelines must be assigned Controls and Metrics
for the closure of.......................... in R2R
d) Proper.......................... must be done to ensure that there are enough
team members in the transaction processing team at all times.
e) There should be division of work between............... and reconciling.
f) Awareness of downstream impact of a transaction can be enabled through
an ................................perspective.
2. State whether the statements areTrue or False:
a) On the purchase of a fixed asset, invoice must be mapped to budgets.
b) There should be standardized reconciliation templates.
c) Principal mistake refers to an accounting entry error such as Capital vs.
Revenue.
d) Soft close is an important control point in the case of reconciliations.
8.4 METRICS FOR R2R
Metrics refer to measures of performance. In an outsourcing scenario, it is very
important to measure and report performance. It speaks of the success or otherwise
of outsourcing to the customer.
Before we go on to explain the types of performance metrics, let us understand
the basis of development of metrics. Metrics are derived from the overall objectives
of a process. For example the objectives of a transaction processing process ould
be to accurately process maximum number of transactions within a particular
time frame. Similarly, the objective of a reconciliation process would be to reduce
the number of mismatched items by timely resolution of all such items.
There is a set of generic metrics applicable to any process and metrics specific to
each of the R2R processes. Let’s understand each of these.
Generic metrics for R2R
1. Timeliness- Timeliness refers to ‘Time taken to perform a particular activity
in a process’. In the global outsourcing F&A world timeliness is of utter
importance. All processes have a time limit under which they have to be
performed in. This is what is called a TAT (turn around time) for that particular
job. Thus simply put TAT is the time taken to complete any job.
2. Accuracy- Accuracy refers to ‘Number of transactions processed accurately
as per the laid down performance parameters’. The importance of accuracy
cannot be questioned. It is very important that each and every transaction is
processed and that it is done with full accuracy. Common accounting errors
such as not enough evidence was gathered to substantiate the closing balance
but it was still signed off as correct or even though enough evidence was
gathered but processed inaccurately and many other such incidences could
cause a lot of problems for the management for their decision making as it
would be based on incorrect data. Accuracy gets highlighted while performing
quality checks (QC) or audits on an activity/process. There is a dedicated 143
Record to Report (R2R) QC/audit team which rolls out the quality scores or accuracy percentage for
each processor. In fact, quality is also one of the parameters on the basis of
which incentives of a processor are determined.
3. Volume- Volume refers to ‘Number of transactions processed in a partcuIar
time period’. Volume is an important metric from an overall process.
Important decisions are taken on the basis of volume figures for a particular
process. Number of people to be hired or required on floor at all times,
infrastructure and technology requirements for a process- all are dependent
on the volume of transactions. In fact, in BPOs, pricing is also determined
on the number of transactions processed.
4. Productivity- Productivity refers to ‘Number of transactions processed by a
processor in a given time period, say an hour or a day’. This is an important
internal metric for an organisation. The better the productivity of a team, the
lower the costs. Incentives of processors in a BPO are based on their
productivity. In some cases, the customer also links incentives of the service
provider on the basis of efficiency/productivity savings achieved.
5. Cycle Time- Cycle time refers to ‘The time taken to complete a process
(which may comprise more than one activity)’. While timeliness is calculated
with reference to an activity in a process, cycle time is calculated with
reference to a process comprising all activities therein. It is an important
performance measure when the overall efficiency of a process is to be gauged.
6. Compliance- Compliance refers to ‘Percentage of laid down compliance
parameters met while performing an activity’. Compliance refers to not only
the statutory and regulatory compliance but also compliance with the
parameters defined in the service level agreement (SLA).In the case of R2R,
this assumes criticality as laid down control and compliance parameters must
be taken care of while recording as well as reporting. In some organisations,
adherence to compliance checklist is a part of the quality parameters and
gauged at the time of QC or audits.
Specific metrics for R2R:
Some examples of metrics for specific processes are mentioned below.
1. Number of manual journal entries passed (Volume)
2. Number and value of accrual entries passed (Volume)
3. Number and value of accrual entries omitted (Volume)
4. Number and value of open items in bank, AP or AR reconciliations (Volume)
5. Ageing of open items in bank, AP or AR reconciliations (Volume)
6. Number of accrual entries passed accurately (Accuracy)
7. Numbr of reconciliations where reconciliation guidelines not followed
completely (Accuracy)
8. Number of vouchers processed without supporting documents (Compliance/
Accuracy- Exceptions)
9. Time taken to process a transaction, say accrual or capitalization (Timeliness)
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10. Time taken to perform a reconciliation (Timeliness) Controls and Metrics
in R2R
11. Time elapsed between identification of an open item and its resolution (Cycle
time)
12. Time elapsed between receipt of request and recording of entry (Cycle time)
Check Your Progress B
1. a) Time taken to perform an activity is called___________.
b) Metrics refer to measures of_______________.
c) Metrics are derived from ____________the of a process.
d) TAT is related to___________ metrics.
e) Volume refers to ______________.
f) In BPOs, pricing is also determined on the basis of ____________.
2. Number of vouchers processed without supporting documents is what type
of metric?
a) Accuracy
b) Compliance
c) Volume
d) Productivity
3. Number of transactions processed by a processor in a given time period, say,
‘an hour or a day’ is what type of metric?
a) Volume
b) Productivity
c) Cycle time
d) Timeliness
4. Time elapsed between identification of an open item and its resolution is
Timeliness metric. (T/F) .
5. Accuracy gets highlighted while performing quality checks (QC) or audits
on an activity/process (T/F)
8.5 LET US SUM LIP
Controls are a requirement not only from a statutory and regulatory perspective
(be it the Sarbanes Oxley Act or the Securities Act in the US or the Companies
Act in India) but also from an ethical perspective.
The type and level of controls in R2R can be understood by the kind of errors that
can be committed while the R2R process is conducted. Errors can be broadly
classified into three categories which are as follows:
1. Timeliness Errors
145
Record to Report (R2R) 2: Accuracy Errors
3. Others Errors
Each of these errors causes problems in the financial book keeping system of the
client. These can lead to downstream delays and errors or it could cause wrong
Income Statement (P&L) or wrong Position Statement (Balance Sheet). All this
could lead to having adverse audit comments and embarrassment and loss of faith
with the client.
General R2R controls include- Standardization of systems, proper work planning,
seamless system support, proper hiring, adequate process and systems training,
complete desk instructions/standard operating procedures, complete policy manual,
awareness of the downstream impacts, proper quality checks and proper
documentation and archiving procedures.
Metrics refers to measures of performance. In an outsourcing scenario, it is very
important to measure and report performance. It speaks of the success or otherwise
of outsourcing to the customer. Metrics are derived from the overall objectives of
a process.
General R2R metrics include- Timeliness, Volume, Accuracy, Productivity, Cycle
time and Compliance.
8.6 KEY WORDS
R2R is Record to Report. It referes to the entire process of recording any
transaction that happens in the organisation and then reporting it in the companies
financial statements.
Sarbanes Oxley, Act of 2002: Is a United States of America Federal Law which
was enacted on July 2002. This law came into force because many corporations
were misrepresenting their financial numbers which then affected the share prices
of these companies and lead to losses to the small individual investors. The
legislation established a new or enhanced standards for all U.S Public listed
companies for reporting their financial numbers at the stock exchange and held
the CEO and CFO personally responsible for all financial statements and the risk
involved in doing their business.
TAT : This acronym stands for Turn-Around-Time. TAT implies the projected
time taken to perform any job from start to finish. Thus an Invoice comes for
payment and it has to be cleared within 72 hours by the accounts department, we
say the TAT for invoice payment is 72 hours.
Transaction Processing : Is when any transaction that has occurred in the company
and comes up for processing to the accounts department or the BPO.
Month end reporting: As all the books of accounts have to close on a regular
periodicity (Month/Quarter/Annual). Month end reporting is when all books of
accounts are closed and tallied and the financial position is obtained,
Metrics : A way or mechanism of measuring the productivity of any process or
sub process. Example, an accountant has to enter 100 vouchures daily in the ERP
if he does only 98, he has not met that day’s metric and it would be analysed as to
146 why that happened. This of course is a very simple example.
Controls and Metrics
8.7 ANSWERS TO CHECK YOUR PROGRESS in R2R
Answers to Check Your Progress A
1A a) Errors b) Budgets c) Unreconciled items d) Effort planning
e) Accounting f) End-to-end
2A a) False b) True c) True d) False e) True
Answers to Check Your Progress B
lB a) Timeliness b) Performancec c) Objectives d) Timeliness
e) Number of transaction processed in a particular time period
f) Number of transactions processed
2 Accuracy
3 Productivity
4 False
5 True
8.8 TERMINAL QUESTIONS
1. Give two examples for each:
a) Accuracy errors
b) Timeliness errors
2. List any two risks associated with Fixed Assets. How would you control
each of those?
3. How is WIP certified in the case of Fixed Assets?
4. Briefly explain soft close.
5. Explain how proper hiring and training act as controls?
6. What is metrics and how are they developed?
7. Differentiate between Cycle time and Timeliness.
8. What do you mean by downstream impact of errors?
9. What is the importance of volume metrics?
10. Describe the accuracy metrics.
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