Group controlling versus consolidation

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How group controlling department can complement consolidation department (and vice versa) to improve production of financial information?

Group controller and consolidation accountant are two different functions in the finance team. However, it is beneficial for the two functions to communicate and exchange information to improve the quality of work carried out by each of them.

To understand this better we shall examine first the differences between these two finance functions. Then we shall look at the possible interactions between the two roles.

1. Controller and consolidation manager: their roles and missions

Before we begin, here is a quick summary of the roles and responsibilities of each one:

The group controller has to:

  • Establish indicators to ensure that the company is operating in accordance with objectives (financial and non-financial indicators)
  • Measure actuals obtained
  • Flag any variance
  • Attempt to analyse actual causes

The consolidation manager has to:

Draw up the group’s consolidated accounts
Take part in the audit of these accounts carried out by external auditors
Ensure that accounts be filed with the relevant authorities
Manage the valuation rules applicable to all companies within the group

2. Two distinct functions in terms of approach and purpose

Differences between these two functions may be seen in:

1. Frequency in reporting:

Reporting is typically carried out monthly. Although in some groups consolidation is carried out with the same frequency, many groups still consolidate on a half-yearly basis. As a result of frequency and other factors which we shall analyse later, the rapidity in presenting results is equally varied.Reporting requires shorter response times.

2. The impact of the socio-economic situation:

The socio-economic situation affects these two functions but where the group controller is expected to anticipate its effects, the consolidation manager will attest to, and give evidence of, the impact of the situation.

3. Data comparison and variance analysis criteria:

The group controller compares actuals against budgets or forecasts.Using these comparisons he will analyse variances and trends, identifying the causes and, in some groups, suggesting corrective action. The consolidation manager will analyse and offer a general view of consolidated data compared with the previous financial year end or the same period in the previous financial year. Variances between periods must be explained in accompanying tables and, particularly, be 100% accurate and exhaustive. These data will undergo external checks by statutory auditors.

4. Scope of consolidation (entities, companies, etc.):

For the group controller, the scope of consolidation of the group is considered primarily from an economic point of view. It is essential to monitor and analyse the performance of those departments and companies with the greatest economic importance across the group. It is not unusual for reporting frequency to vary according to the size and turnover of the subsidiary. The essential criterion is the ability to state variances and trends compared with budgets and to take the necessary action on a group level. In this case the limited influence of some companies often serves to exclude these ‘small’ companies from the detailed analysis of figures reported or even from monthly reporting itself.

In contrast, the consolidation manager is obliged (particularly since the advent of IFRS) to include all companies falling within the scope of consolidation, or those exceeding the criteria related to the group’s percentage holding of the company in question. He will consider it more from the perspective of legal entity. The advent of IFRS and its segment information is having the effect of bringing these two approaches closer together.

5. Viewpoint and interpretation of figures:

The method of consolidating these companies could also vary greatly depending on the viewpoint of the group controller or consolidation accountant. From an economic viewpoint, the group controller typically takes full account of companies when preparing budgets and comparing actuals.

The consolidation manager must apply the consolidation method based on the group’s percentage of control over the subsidiary. This has an effect on the value of consolidated accounts or on the resulting ratios.

6. Recipients of information:

The group controller addresses primarily individuals within the organisation with the intention of providing them with the information required for operational decisions, namely, financial and operational managers and the board of directors.

The consolidation manager will primarily provide information for people external to the organisation or its day to day operational management – such as auditors, shareholders and financial analysts.

7. Methods of information control:

Related to the previous point, consolidated data undergo stringent external control, are the subject of a letter of approval of financial statements and of a legal deposit.

8. The level of detail of information:

The group controller, in his task of analysing variances against budgeted or forecast data, needs sufficiently detailed information to identify causes and provide evidence of their impact upon results. For example, he needs to know the product or products achieving fewest sales, the raw materials which proved more expensive than expected and which customers have ordered less. This important information should, therefore, be far more detailed than that required for accounting purposes.

For this reason we go on to look at multidimensional analysis of accounts.

The consolidation manager needs very detailed information on every single account in the balance sheet and profit and loss account. For each of these accounts he will require explanations of changes to this account from one period to the next. Additionally he will need information on the type of operations affecting these accounts during the period in question. This information could also be, for example, legal in nature.

9. Types of data analysed:

The group controller concentrates primarily on EBIT-type operating data but at a very detailed level to analyse variances and trends and to anticipate the impact of the economic situation on data in future periods.

The consolidation manager must focus more on balance sheet data and changes to it using the profit and loss account as a check for consistency in these changes. Furthermore, he will have to handle different operations proper to his function, often poorly understood by the group controller, such as dividends, reduction in the value of stock, internal transfer of stocks, calculation or assignment of goodwill, currency conversion differences, minority interests, deferred taxes, etc.

10. Adjustments made to the reported data:

Processing by the group controller, most typically ‘summation’, may be used for projections, simulations and analysis of variances and trends. These enable him to identify key areas to work on and to offer solutions.

The consolidation manager carries forward adjustments from the past and adapts subsidiaries’ data to apply the same rules on valuation of accounts to all companies within the group and thus ensure continuity of information. He should also ensure that data proper to operations carried out between companies within the group be reconciled to avoid any effects on accounts presented to external bodies. The processing undertaken will be essentially consolidation.

11. The approach to inter-group data:

The group controller’s approach is to isolate this information to analyse the exempted data relating to these transactions. As with the budget, his approach will be to start with a purchase and allocate that same amount to the vendor. In the budget, the expected level of sales will determine the quantities of raw materials necessary for production.

The consolidation manager has the opposite approach. It is generally the vendor, namely the company issuing the invoice, who holds sway and who can allocate the purchase transaction to its counterpart in ERP. Furthermore, due to the possible volume of transactions, the impact of currencies and the production of capital goods, these processes are often highly time-consuming for the consolidation accountant and sometimes cause problems for the audit by statutory auditors.

Where for the group controller it is a case of non-relevant information, for the consolidation accountant this information must be well managed by subsidiaries and reported correctly.

This list, while not exhaustive, demonstrates the extent to which these two functions differ in their approach and their purpose.

3. Points of similarity

There are, however, similarities between these two functions. The main aspect is that group controllers and consolidation managers use many common data even though, as we saw earlier, they are processed differently and used for different purposes.

The partnership between those working in management accounts and those in consolidation must, therefore, be at the level of obtaining data.

4. A partnership to be created

Thus, consolidation of data reporting considerably improves the consolidation and reporting processes (in terms of quality, speed and effectiveness).

The group controller is more frequently in contact with subsidiaries (monthly reporting, budgets, forecasts, budgetary adjustments) and he is therefore closer to the different entities within the group and, importantly, has prior knowledge of the facts compared with the consolidation manager. The consolidation manager must have the information allowing him to restate the accounts of subsidiaries to incorporate them in his consolidation. We think, for example, of stock management and valuation, methods of depreciation practised locally by subsidiaries, intra-group profits achieved as a result of the sale of shares between the group’s companies, etc.

For these different elements, given that the group controller has more rapid access to these data, he can play a very important role as provider of information compared with his colleague in consolidation.

The consolidation manager must ensure that he informs his group controller colleague of entries (dividends, provisions, minority interests, depreciation of goodwill, deferred taxes, etc) which will have an impact on the results and ratios analysed by the group controller.

These same entries may play a dominant role during transfers of certain group subsidiaries, for example.

It is thus essential that these two functions work as a true partnership: mutual understanding of accounting treatment, use of common software (with shared data) and exchange of information will all contribute to a significant improvement in the entire process!

If you are currently considering the implementation of specific actions to improve the quality of your financial data, the creation of a more effective partnership between group controlling and consolidation accounting in your group should form part of the options to be explored!