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The chart of accounts (COA) is the enterprise’s key financial information asset. It should be clean and consistent throughout the enterprise to enable the organization to summarize and report performance accurately. Most companies find themselves burdened with multiple charts of accounts, whether by acquisition or because departments and subsidiaries went down their own path. Multiple COAs are trouble: they create never-ending and costly problems. Reports don’t match up, drilldown analysis is next to impossible, and there just isn’t any data consistency.
There is no question that every medium- or large-sized enterprise needs standardization across all its COAs. Without standardization, a full-company report or view is hard to attain. Data will get out of synch, and line item detail will not match from one business unit to another. Inconsistencies between COAs make accurate financial reporting extremely difficult. Reconciling disparate COAs also keeps IT and finance unhappily busy.
Most companies try to stem the pain by standardizing their multiple charts of accounts, finding a way to line them up to each other. There are several typical approaches to standardize COAs, usually done as part of implementing data warehouses, analytic applications and consolidation systems. Each has its own drawbacks; and since each unit of the company tends to modify its own COA over time, perpetual busywork is a sure thing.
This isn’t just an issue of disparate accounting categories. It is a metadata challenge, more than an issue of how the charts are broken out. Metadata is the data about your data; and the chart of accounts is data about the organization and structure of your financial data. If in one chart of accounts line item 100 represents revenues from car sales and in another chart the same line item represents revenues from truck sales, what do you have when you look at line 100 at the consolidated company level? A mess. Metadata management is, therefore, essential if your goal is one set of consistent and accurate information company-wide.
Most organizations look at mismatched charts of accounts and don’t see the meta-problem behind them. Accordingly, they try to fix the symptom – the COA – with one of the following:
- Forced compliance with a master COA, the “central command’ approach
- The all-inclusive “permissive parent” chart of accounts
- Multiple mapped charts of accounts
These approaches are superficial. They all require perpetual, year-round reconciliation-plus-consolidation labor, and while they can work for a time, they are not true solutions.
First, the ”central command” approach: you compel operating units to align their COAs with a centrally dictated chart of accounts. It is difficult to enforce and uncomfortable for independent units. It becomes unwieldy when the number of general ledgers (GLs) rises. Headquarters can demand compliance with the master COA, but if there are a dozen GLs in use, it’s ragged compliance at best.
One hundred-eighty degrees away is the all-encompassing “liberal parent” chart of accounts, which accepts any line item that departments and subsidiaries want to toss in. Your department decides to make a new widget? Just tell the entire company to make a line item for that little newcomer on their chart of accounts. The number of line items balloons over time, which can create performance problems, and minor changes affect everyone across the company. How do you continually adjust reports to the new line items? Your year-over-year reports may need to re-written. It’s a big price to pay for consistency among COAs.
Some companies try an approach called multiple mapped COAs. With this method, each business is free to evolve its own idiosyncratic chart of accounts, but is beholden to map the summary data correctly – hopefully correctly – back to the master COA. This results in a master COA where the number of line items is under control and avoids the politics of making everyone do it one way. However, if every department is responsible for synching its summary data to the corporate COA, you know they aren’t all going to do so with complete consistency. When looking at a company report, the one thing you can be sure of is that some business unit numbers are creating inaccuracies.
Having covered what doesn’t work well to straighten out the challenge of multiple COAs, what does work?
Enterprise Dimension Management (or Master Data Management)
Enterprise dimension management, or EDM, addresses the underlying problem. EDM allows continuous standardization of multiple charts of accounts. EDM is accomplished through software that controls the metadata and who has access to modify it. Your data handling systems, including GLs, subscribe to the EDM system, and thereby allow it to keep tabs on dimension changes. This not only keeps different COAs in synch, but also keeps reports in synch, as well as other databases and applications. EDM handles the metadata of an enterprise, giving users with the right privilege level the ability to control and make changes in how data is organized.
EDM provides “a dimension of record” that goes beyond each general ledger and allows change management of the dimensions used in accounting and reporting. EDM also unifies the data structures of the chart of accounts, reports and data repositories such as data warehouses and data marts.
There’s another big positive of EDM: by unifying the data management, it allows company-wide views of performance that are so important to business performance management (BPM).
Conflicting COAs are only one face of metadata inconsistency. When dealing with business performance systems, there are challenges around hierarchy/roll-up structures, product and customer dimensions, and the list goes on. With institution of an EDM system, a company can ensure that metadata for all areas of BPM stays in synch.
Enterprise dimension management provides a good solution to the problem of mismatched charts of accounts. It does this with a central point of control, low maintenance and flexibility. EDM lets the local branches have multiple line items per widget if they find it necessary, but the data still rolls up just the way headquarters wants it to. With EDM, local systems go on as they are and keep their account structures, while the enterprise can have the collaboration and consistency that it wants.
EDM incorporates security to keep employees from getting too creative with report dimensions; role privileges are assigned and changes are tracked, making it difficult to tamper with report structures.
An Effective Approach
Because the challenges of consistent report structures, enforcing data consistency in how line items are rolled up and standardizing the charts of accounts are all parts of the same challenge, one solution that addresses all three problems is preferable. EDM is an effective approach to the struggle that most companies have with standardizing the multiple charts of accounts.
A jumble of different charts of accounts weighs directly on IT systems. If the underlying data is organized in many different ways, it is disorganized – unless the metadata is correct. Enterprise dimension management systems keep the metadata organized. More precisely, enterprise dimension management systems allow designated administrators and managers to keep metadata organized.
When you set up a metadata management system, such as EDM, you help ensure correct reporting, aid Sarbanes-Oxley compliance and allow the company to prevent confusion caused by disparate charts of accounts. Once fully implemented you are in a position to achieve the holy grail of business performance management systems: one version of the truth.