Making Sense of Oil and Gas Financial Reporting
Reduce Financial Reporting Risk by Identifying the Sources
Updated March 2023
To state the obvious, financial reporting is essential to your business. And then some. In fact, poor reporting – particularly of the slow or inaccurate variety – exposes an enterprise to heaps of unnecessary risk that only grows in size and impact over time. And that’s not great.
Therefore, from bankers and regulators to investors and decision-makers – and pretty much everyone in between – the list of people and entities either dependent on or affected by your reports is a lengthy one. That makes your ability to effectively manage financial reporting risk a critical component of your success and future viability as an organization.
But where do you even start addressing such a potentially complex problem? Well, just like any risk assessment and action plan, rooting out the underlying issues is essential. And when it comes to financial reporting, that means identifying the risk factors making your reporting slow, inaccurate, and unreliable. So, on that note, let’s look at ten of the most common reasons why a reporting function might have a hitch in its giddy-up so you can start transforming your financial reports from a liability to an unparalleled asset.
1. Migrating Data
Does a data dump from your general ledger to Word or Excel, maybe with a brief stop in a BI tool between them, seem like an entirely good idea? Especially when you can migrate data directly from your GL to a reporting system? Not at all. There’s just too much that can go wrong, from transposing data to flat out skipping entire swaths of vital information.
Inaccurate financial results and reports stemming from human error and clunky – or non-existent – internal controls cause delays, material misstatements and restatements, as well as an overwhelming sense of uncertainty around a business. And if most of those weren’t bad enough for a private business, public companies are under even greater scrutiny. Needless to say, the fine folks at the Securities and Exchange Commission (SEC), your bankers, and analysts across Wall Street don’t appreciate such data calamities.
Simply put, printing out a report from your ERP and hard entering the data into a report creation tool like Word and Excel is the antithesis of efficiency and accuracy. To make matters worse, as additional entries come in, you’ll have to keep entering that data into your draft financial statements. And while that might seem like an extreme example, we assure you it’s still happening. Every day.
Thankfully, manual entries and other data black holes don’t have to unnecessarily expose your reporting to risk, especially when comprehensive solutions are available to automate your data and reporting. We’ve had great success with Workiva in these instances, but we encourage you to research financial reporting systems on your own to make a decision that’s best for your specific needs and goals.
2. New System Implementation
Speaking of reporting systems, taking the plunge and investing in a new system is a critical first step that we applaud you on, assuming you’ve chosen wisely once the time comes. However, picking the best solution is only the first step since plenty can go wrong during implementation.
When you’re moving from one system to another, take the proper steps to ensure data validity throughout the process, mapping everything ahead of time, and using the right migration techniques to make it as seamless a transition as possible. Also, rather than using hard cutoff dates between your old and new systems, parallel processing between the two can help you avoid reporting delays if any hiccups arise. Likewise, establishing timelines while implementing your shiny new reporting system will keep you on course and on time.
3. No Post-Close Review Process
Those who do not learn history are doomed to repeat it. We’re pretty sure those sage words were first uttered with the financial close process in mind. Or maybe not. Still, it’s undeniably difficult to improve on your close and reporting processes if you don’t take heed of pain points as you go. In other words, your reporting will remain slow or inaccurate without frequent post-close reviews to identify inefficiencies and resolve them.
Think of such a review as a postmortem on your close process, where your team gets together to discuss what went right, what could be better, and streamlines everything going forward. It doesn’t have to be an elaborate or drawn out session, perhaps a team meeting every quarter or so, just so you can continue to refine your closing. A post-close review is especially important for any changes to operations, reporting requirements, or accounting principles, making sure your close stays on track.
To that point, look at your financial reporting process as if it’s your car. No matter how silky smooth it runs today, you still need to periodically change the oil, rotate the tires, and swap out the air filter. Otherwise, entropy takes a hold and won’t let go, a notion that’s true for your car, health, or financial reporting, slyly shifting from order to disorder unless you can stop the erosion.
So, like changing your oil or going for an annual physical with your doctor, a post-close review is a critical tool in mitigating risk and preventing your reporting process from slowly but surely coming apart at the seams.
4. Waiting for Data
Conversely, there are plenty of areas within your reporting processes that hardly change a lick – if at all – between periods. Many accruals, for instance, are very predictable, as are several AP items. Thus, there’s no need to delay your reporting by waiting for the invoice from your internet service provider when you already know what the total will be.
Likewise, if your electricity invoice comes in after close every month, put it on an accrual checklist. You can also run depreciation and amortization earlier once you’ve added all of the additions. The point is, get these items out of the way and devote your time and attention to more dynamic, risk-oriented financial data points that will require more effort from your team.
5. Being Reactive Instead of Proactive
Similarly, it always makes sense to look down the reporting road to anticipate events, transactions, and changes in financial reporting standards that will demand more of your time. When your financial reporting director is plugged into management decisions and aware of upcoming events or transactions, the entire reporting process becomes smoother and faster.
Put differently, your perspective should be proactive rather than reactive on the reporting front where, for example, you’re contacting the involved attorneys in advance of a significant transaction. Or are continuously aware of where the regulatory and accounting standards are heading at any given time.
Taking this course, you’ll have the information you need rather than scrambling at the last minute to pull your reporting together. A proactive stance is particularly critical when dealing with disclosures or any other area you might be unfamiliar with, giving you plenty of time to do any necessary research and avoid delaying your reports.
6. Version Control
Having everyone on the same page – both literally and figuratively – seems like common sense. Unfortunately, many organizations still needlessly struggle with version control in their reporting process, despite having reporting solutions available that centralize information so everyone can work from a single source of truth.
Thankfully, a reporting function doesn’t have to rely on emailing a document from employee to employee, where file naming becomes a crapshoot and no one knows exactly where anyone else stands. Instead, a comprehensive reporting system removes those unwanted variables and allows people to work from the same centralized document.
Aside from version control, a sound reporting system can also link information from different databases or reports, automatically updating whenever new financial information comes around. This is yet another instance where eliminating manual entries only speeds up your reporting while also improving accuracy and – once again – mitigating yet another potential source of significant risk.
7. Improper Staffing & Work Prioritization
Just like any department within your organization, accounting needs the right people in the right positions for everything to run like a well-oiled machine. Everyone from your financial reporting director on down must be well-equipped to handle the rigors of the job, especially when an important transaction is on the horizon.
Now, we’re not saying you should go out and hire a bunch of new accountants simply because of an upcoming transaction. You should, however, have your accounting talent ducks in a row. Naturally, having your friends at Embark in your mental Rolodex when you need to quickly ramp-up your accounting knowledge and skills for a specific project or initiative can certainly come in handy. But that’s not a permanent solution for day-to-day operations.
For those daily tasks – including your reporting processes – always align your talent with the position, trying to avoid placing your employees, teams, and enterprise in peril through misaligned skill sets. Likewise, be clear with assignments and timelines so everyone functions as a cohesive unit rather than an inefficient, inaccurate, disjointed mess.
8. Data Inconsistencies
Nothing creates storm clouds over your operational waters like data inconsistencies, even minor or inconsequential ones. For example, maybe you’re rounding your figures in your disclosures, resulting in data that’s a single digit different from those in your financial statements. While that difference might be immaterial in practice, the reality of those slightly differing figures can make you look incompetent and ill-prepared.
Instead, embedding subtotal and cross reference data checks within your reporting processes can help you save face and make sure all of your numbers match. These checks are a simple but extremely beneficial control that pays dividends as your reporting becomes more complex and dependent on information from a variety of sections or separate reports.
9. Manual Edits and Comments
Let’s say there’s a transaction coming up for your organization, so attorneys are constantly involved in your reporting, reviewing various documents and reports to ensure compliance and accuracy. Rather than printing out your reports, giving them to the attorneys, having them make edits and comments by hand, and then giving them back to you for revisions, plug the attorneys into your reporting system to make the process both faster and more efficient.
This best practice is useful for the many different stakeholders involved in the reporting process. Using Workiva as an example, an organization can provide unlimited users with extremely specific access to databases, documents, or even particular portions of documents. For obvious reasons, this is much more efficient than handing out dozens of PDFs and then tasking someone on your team with distilling all of the edits from different users into a single cohesive document.
As a slight aside, bringing third parties into your reporting process can also help identify inaccuracies and inefficiencies that might otherwise slip through the cracks. As the old saying goes, two pairs of eyes are better than one, so a third-party could very well spot gaps in your internal control environment, business processes, or talent that slow down your reporting or impact its reliability.
10. No Administrative Coordination
Sometimes, even with the most advanced and efficient reporting systems, workflow can still bog down. However, you can prevent many of these bottlenecks by simply coordinating your workflow. For instance, when you have multiple people requesting the same report – one that already takes a good amount of time to generate – a logjam is inevitable. With a bit of forethought, though, everyone can still have access to the reports they need without delaying the entire process.
Placing a frequently used report in a shared drive gives your financial reporting team the information they need, all while avoiding disruption to your workflow. You can even ask IT to populate the most current version of that report every morning in the shared drive, so everyone knows they’ll have a clean, updated report to work from each day.
The Bottom Line – Reporting Risk Is Corporate Kryptonite
As you probably noticed, your people, systems, and controls are usually the source of slow and inaccurate reporting and, thus, financial reporting risk. So, devoting sufficient attention to those three components can greatly improve the speed and reliability of your financial reporting, mitigating risk as you go.
Afterall, with such high stakes involved – debt covenant defaults, restatements, a loss of confidence from the public and your stakeholders, to name just a few – investing in these key elements of your reporting function can pay dividends for your entire organization well into the future.
Otherwise, if you’re a public entity, your external auditors will rightfully make your life much more difficult, people will look at your annual report sideways, and your corporate governance and senior management will find themselves under an extremely unflattering light. But, as you know, the damage can go far beyond those external factors and forces.
Aside from failing to meet reporting and regulatory requirements, poor reporting directly impacts your decision-making, and not in a good way. The very same data and processes fueling your external reporting also feed your management reports. Further, slow and inaccurate data create quite the pickle for your budget and budget process, affecting everything from cash flow to forecasts and a CFO’s ability to make sense of virtually anything. In other words, you’re a ship without a rudder, and the seas are getting pretty turbulent.
So, now that you’re sufficiently scared, where do you go once you’ve identified potential sources of financial reporting risk? Depending on where you are on the corporate spectrum, either developing or improving internal audit is a great start. Likewise, transforming finance to automate manual processes, improve systems and data sources, and streamline reporting with purpose-built tools are also incredibly helpful. As is a data culture initiative that places business information at the center of your decision-making.
But you have to walk before you run. So our advice on the reporting risk management front is to start small with the lowest hanging fruit to get some big wins under your belt. Maybe that means automating a few manual processes that are particularly repetitive and error-prone. Or combining systems to make your data environment a bit tidier and more efficient.
From there, you can start looking at the bigger picture to improve the people, processes, and technology that can – to paraphrase ourselves – transform your financial reporting from a liability to an enduring strength. And thankfully, Embark’s team is just the people to help you chart that especially effective and prosperous course. So let’s get to work on reducing risk and making your reporting the shining star it was always meant to be, shall we?