Streamlining reclassifications for financial accuracy

I can vividly recall the pain of the month-end close, particularly the last-minute adjustments and the need to continuously monitor the trial balance to ensure no significant changes impacted the financial statements. If changes affected the balance sheet, would a reclassification adjustment be required?

The introduction of spreadsheets, modern general ledgers and ERP systems was supposed to transform the month-end close, and it did to some extent, but these new technologies introduced problems. In some cases, they created more work, data duplication and a whole new set of technologies to maintain, update and manage. 

In the case of reclassifications, there continued to be a complete reliance on time-consuming manual processes for identifying and posting reclassification adjustment journals to the general ledger, opening the door to the possibility of errors with the dire consequences of financial misstatements.

Despite the finance team trying to design better ways of working with the latest finance software, financial reclassifications continued to be stressful, time-consuming and almost entirely manual. If only finance automation software existed when I worked in finance.

Here, I will focus on the challenges of manual reclassification processes, explore why automating reclassifications is now essential and highlight how organizations can use automation technology to reduce month-end closing cycles and lower processing costs while ensuring financial accuracy and efficiency.

Common challenges in manual reclassification processes

If your month-end financial process of reclassifying balance sheet and income statement items in preparing your financial reports relies on manual review, analysis and adjustment — even by your most highly skilled finance team members — several risks and issues still frequently occur, including:

• Auditability and data security: Financial statement adjustments such as reclassifications require appropriate audit trails and data security controls to enable the integrity of the business’s accounting records to be maintained and validated through internal and external audits. However, due to time pressures at month-end, shortcuts taken to save time often result in inadequate supporting documentation being created and stored to enable future interrogation by internal and external auditors. Taking shortcuts at month-end can cost hours of additional effort during audits to create any missing supporting documentation required by the auditors.
  
• Inconsistent application of accounting rules: When human judgment is applied to any financial adjustment, the outcome is only as good as the skills and experience of the person making that judgment. Ensuring accounting rules are applied consistently is a problem in organizations where different staff members undertake the reclassification and other activities each month-end, which can result in errors and missing adjustments.
• More time preparing equals less time analyzing: Manually reclassifying financial statement items is labor-intensive and, at times, tedious for the highly qualified finance team members dedicated to this important task. Time spent on reclassifications would be better spent on higher-value and more rewarding activities such as financial analysis and interpretation.
  
• Misclassification leads to misstatements: Given the typically manual nature of reclassifications, human error is inevitable and raises the risk of financial misstatements. In the case of major misstatements, the specter of having to restate financial reports and filings can lead to financial penalties and serious reputational damage for your organization and its CFO.
  
• Prolongs the month-end close: Finance teams that manually review transactions to identify and process reclassification adjustments can take one or two working days to complete the task, considerably extending the month-end close cycle because the work takes place at the end of the close. The inevitable last-minute adjustment further prolongs close cycles, increasing the pressure on finance teams to meet ever tighter reporting deadlines.
  
• Scalability issues: In a growing organization, manually managing reclassifications requires more resources and time to make the necessary adjustments and complete the month-end close. With an increase in transaction volumes and a growing number of legal entities requiring reclassifications to close the books and complex intercompany relationships, there is a clear need for an automated reclassification process. A lack of scalability to manage reclassifications can easily add an additional working day to the month-end close cycle.

The case for automated reclassifications

Given the significant challenges of manually managing reclassifications, what benefits and opportunities does automation offer?

Cost savings

Adjusting financial statements for reclassifications is so crucial that your most senior finance team members would typically be engaged in both identifying and creating the adjustments needed in the general ledger. By eliminating this manual effort to manage your reclassifications, you can achieve significant cost savings and redeploy your senior team members to high-value activities, including financial review, analysis and interpretation. 

Elimination of financial misstatements

Using pre-defined rules applied consistently during each month-end close, automated processes eliminate human error and the possibility of overlooking required adjustments. Automated reclassifications also prevent financial misstatements and the subsequent damage, reputationally and otherwise, that inevitably occurs.

Enhanced global scalability

Automation can readily accommodate the growth in the volume of reclassification adjustments required at month-end caused by factors such as business expansion or regulation and changes in accounting standards. The automation technology can identify and adjust for reclassifications in minutes, while manual reclassifications add hours of time and effort to the month-end close. Late accounting adjustments, which typically occur toward the end of the close cycle, are particularly time-consuming. Automated reclassifications can be processed multiple times during the month-end close to accommodate late changes to the general ledger account balances without any significant human intervention or extension to closing timelines.

Faster close cycles

By automating financial reclassifications, you eliminate the need for manual adjustments and reduce the time and labor required to finalize financial statement preparation. Automation also reduces the impact of last-minute postings and corrections to the general ledger, allowing finance teams to accelerate the financial close. Fewer manual interventions mean your finance team can focus on analyzing and interpreting financial information rather than spending hours on transaction processing and adjustments, which means they can close the books earlier. 

Increased accuracy and internal controls

General ledger transaction and financial statement analysis requires configurable financial rules and criteria, with automation achieving a consistency and completeness that cannot be matched by human effort alone. Pre-defined reclassification rules and criteria identify and record the necessary adjustments with minimal human effort, other than any Four Eyes checks and approvals required by your internal control procedures. The precision and accuracy of automated reclassifications boost internal controls and minimize the possibility of costly misstatements.

Improved audit readiness

Reclassification adjustments need appropriate supporting documentation to enable verification by auditors. Automated reclassifications ensure proper audit trails and capture supporting documentation for each reclassification adjustment made to your general ledger. 

How Redwood’s solution automates and transforms your financial reclassifications

Finance Automation by Redwood integrates seamlessly with ERP systems like SAP, ensuring accurate and efficient reclassifications by using your core financial records to identify and process the reclassifications required to adjust your financial statements. 

Key features include:

• Configurable rules and workflows: Allow finance teams to set customized reclassification rules aligned with organizational policies and accounting standards. These automated rules are applied consistently during each month-end close across multiple legal entities and geographies.
• End-to-end automation: Eliminates the need for spreadsheets, manual data collection, data duplication, data validation and manual data entry, ensuring data accuracy, speed, consistency and efficiency. The automated process identifies the necessary reclassifications and generates and posts the required journal entries without the need for human intervention — other than any reviews and approvals you define within the end-to-end automated process.
• Real-time monitoring and alerts: Provides visibility of the ongoing reclassification process, ensuring timely adjustments, approvals and reliable financial information. A comprehensive dashboard provides real-time visualization of the entire month-end close, including the processing of reclassification adjustments.
• Data security: Automated reclassification only collects, interprets and processes the auditable and validated data within your general ledger based on pre-defined access rules and security controls. Additional reviews and approvals can be incorporated into your automated process to provide the required internal controls necessary to satisfy financial and information security policies.

Learn more about automating finance processes, including reclassifications, with this comprehensive guide.

Automate your reclassifications with Finance Automation by Redwood

Manually reclassifying line items in your financial statements is a laborious and error-prone process that is difficult to scale as transaction volumes increase. By automating reclassifications, you improve accuracy and compliance in an efficient and cost-effective manner, allowing your finance teams to focus on value-added activities at the most critical stage of the month-end close. 

With Finance Automation by Redwood, your organization can streamline financial close processes, eliminate repetitive tasks, reduce errors and ensure regulatory compliance on your journey to a fully automated touchless close as a key component of your automation fabric.

Sign up for a demo of Finance Automation by Redwood here.