Year-End Close: Proactive Tips for CFOs and Controllers

It’s already December! If you haven’t started planning for your 2024 financial close and financial statement audit, there’s still time to lay the groundwork for an efficient and effective close. A well-executed financial close ensures your organization achieves key outcomes, setting the foundation for accuracy, efficiency, and compliance. The process should aim to:

• Deliver Accurate Financial Statements: Capture a true and fair view of your company’s financial health to support informed decision-making and maintain transparency with stakeholders.
• Ensure Compliance with Regulations: Meet required reporting standards and reduce exposure to risks, including fines or reputational damage from non-compliance.
• Maintain Consistency in Financial Data: Provide reliable records that enable clear trend analysis, improve forecasting, and guide strategic planning for the future.
• Optimize Operational Efficiency: Streamline processes and workflows, reducing time spent on manual tasks and freeing your team to focus on higher-value activities that drive the business forward.

As you prepare, here are a few key areas to consider for a seamless close and audit. Early attention to these areas can help avoid last-minute surprises and increased costs down the road.

1. Establish or Revisit Your Year-End Close Timeline and Checklist

An effective close process begins long before the end of the period. We recommend revisiting your close checklist at least one month prior to close. This allows the team to:

• Identify any changes needed in team preparer and reviewer allocations, completion dates, or tasks to be performed.
• Spot opportunities to pre-close financial information or prepare portions of the close tasks before year-end (e.g., rolling forward financial statements, preparing fixed asset rollforwards, assessing the allowance for credit losses, and comparing original estimates to updated data—such as estimates for variable consideration, percentage of completion, and customer lives).

Most importantly, distribute the final close checklist or allocation one month prior to close and ensure the team maintains responsibility for their assigned tasks through the end of the process.

2. Inventory Counts and Fixed Asset Verifications

For companies with substantial inventory or fixed assets, year-end physical counts are a significant undertaking. Begin planning for these early, especially if you have multiple locations. Coordinate with operations to establish procedures for accurate counting, and engage your external auditors early for count observations. This proactive approach helps prevent complicated inventory reconciliations if inventory counts cannot be observed by the audit team at year-end.

3. Review Estimates and Accruals

The period leading up to year-end is an excellent time to assess and adjust key estimates and accruals, such as:

• Allowances for doubtful accounts
• Inventory excess and obsolescence
• Long-lived asset useful lives
• Revenue estimates
• Warranty liabilities
• Contingent liabilities

Ensure these estimates reflect current information and align with historical trends. Revisit significant estimates with updated data to confirm they’re reasonable and consistent with the entity’s experience and expectations. This is especially important if your company operates in sectors affected by recent economic changes, where factors like inflation or shifting customer demand may impact reserves.

4. Prepare for Complex Accounting Areas

Ensure your team is ready to tackle complex accounting areas that may require heightened scrutiny during the audit. This includes:

• Debt and Equity Issuances: Review legal agreements for any new or modified debt, equity, or hybrid instruments. Verify they are appropriately accounted for and document conclusions reached for initial and subsequent recognition and measurement in accordance with US GAAP.
• Revenue Recognition: Re-examine contracts to verify that revenue is recorded in accordance with ASC 606. Confirm all performance obligations have been satisfied and update any estimates for variable consideration.
• Lease Accounting: Under ASC 842, ensure lease modifications, terminations, or new leases are accounted for accurately, and that lease liabilities and right-of-use assets are recorded appropriately.
• Stock-Based Compensation: Review any new or modified awards and ensure expense recognition aligns with your accounting policies, particularly if there have been significant modifications, grants, or vesting changes.

5. Review the Trial Balance and Balance Sheet Reconciliations

Before handing over financial statements to auditors, conduct a comprehensive review of the trial balance and ensure all accounts are reconciled. Focus on areas such as cash, accounts receivable, fixed assets, and accounts payable, where errors are more likely to occur. Address any unresolved reconciling items now to avoid last-minute adjustments during the audit process.

6. Strengthen Internal Controls and Document Processes

Auditors closely examine internal controls over financial reporting (ICFR), particularly if your company is subject to SOX compliance. Ensure that control activities are not only performed but also documented, covering areas like segregation of duties, authorization controls, and reconciliation approvals. This documentation supports the audit and provides your team with a clear roadmap for future close periods.

7. Communicate Early and Often with Auditors

Proactive communication with your audit team can preempt potential roadblocks. Schedule preliminary meetings to discuss significant transactions, new accounting policies, and anticipated changes in business operations that may affect the audit. Early discussions can also help identify areas where additional documentation or analysis may be required, enabling your team to prepare in advance.

Conclusion

A strong year-end close process sets the stage for a successful financial audit and provides clarity to stakeholders. By prioritizing organization, collaboration, and forward planning, companies can avoid last-minute fire drills and ensure their financial records are accurate and compliant. Proactive preparation not only reduces stress but also empowers your team to focus on strategic priorities, positioning your organization for a confident start to the new year.

‍Contributors: Travis Topp