The subledger that nobody sees

As the CFO of a Fortune 500 company or a mid-size corporation, what are you trying to achieve from ‘financial transformation’? Is it improving business-process efficiency? Reducing costs? Or, perhaps, simply the fear of missing out: the collective peer pressure to keep up with everyone else?

You have been told that you have just won a golden ticket and can become a trailblazer in your industry, for not only embracing the future but also meeting the customer expectation of what a forward-thinking organisation should look like. But the real question for you to answer is: what are the ultimate objectives you want this financial transformation to achieve?

And the answer to this is as simple as finding cinnamon in an apple pie!

According to Deloitte’s Finance Trends report, one of the top priorities for most CFOs is to strengthen finance’s strategic influence across the enterprise: to unlock the value from ERP and cloud investments, to provide more trusted numbers faster while reducing the cost and risk of operating, and to use that financial data to help the business make better decisions, ultimately making the finance function a more reliable and efficient engine in the company’s decision-making.

But here is the catch: none of this starts from the General Ledger.

Before the financial statements can be reported (often multi-currency and multi-GAAP) and management decisions can be taken based on that financial data, the data needs to be trustworthy, reliable and granular, and it must possess a traceable financial foundation underneath it. It needs to be capable of responding to changing regulations, market shifts and technology.

For any company, and for a financial institution in particular, the source systems are where the financial story of the business begins: they capture the highest level of detail about the transaction and the customer, reflecting the underlying business transaction recorded for loans, deposits, contracts, invoices, payments, insurance policies, investments or any other financial event.

These transactions flow through the subledger accounting layer into the General Ledger and the other financial statements that give the CFO a complete picture of the financial position. However, it is worth noting that the subledger is the financial accounting layer sitting between the operational source systems and the General Ledger: the layer that explains how we got here, why we got here and whether we can trace the numbers back to their origin.

It is this layer that explains the reasoning behind the current state of the business: the granularity needed to understand the direction of financial performance and where corrective or strategic measures need to be taken.

When the subledger is fragmented, inconsistent, difficult to reconcile or disconnected from the underlying business transactions, the CFO’s vision of trusted numbers, faster close, lower risk and better insight becomes extremely difficult to achieve.

But when the subledger is modernised, standardised and integrated with the broader finance architecture, it can become a powerful foundation for financial control, transparency, reconciliation, reporting and, ultimately, better decision-making.

Hence, when we talk about transforming finance, the real question should not simply be whether to replace an ERP or implement a new technology, but whether we can create a financial foundation that allows the management to trust the numbers, understand them and act on them.

What are organisations dealing with?

Multi-national organisations, such as banks, are today dealing with increasingly complex financial environments: multi-currency and multi-GAAP products, complex products with different revenue-recognition and loss-provisioning requirements, multiple source systems, and real-time payments and financial transactions that require continuous account visibility and reconciliation. With the advent of fintechs, economic activity is becoming more fragmented across different platforms, requiring accounting architectures to align and bring together detailed transaction information from increasingly diverse sources. Payments and financial transactions are also leaning towards real time, challenging the accounting process (traditionally historic) to keep pace. Hence institutions need to maintain continuous accounting visibility at all times.

Furthermore, the regulatory requirements are also evolving. It is no longer enough simply to demonstrate what the balance is. Banks increasingly need to be able to demonstrate how that balance was arrived at: the underlying transactions, accounting treatment, calculations and adjustments that contributed to the final number.

As technology accelerates, more new use cases for applications relying on unified, consistent and reliable data are emerging. This calls for selecting the right tools to ensure data harmony, transparency and consistency across the board.

Approaches available for accounting treatments

Where should the accounting treatment be captured throughout this process chain: at the source, at the destination, or somewhere in between?

The first approach would be to deal with the accounting treatment directly at the source-system level.

But that can become difficult to manage as products, services and regulations become more complex. Every change in accounting treatment or regulation could require changes across multiple different source systems. This can create challenges around consistency, traceability and auditability.

Another approach would be to deal with everything at the General Ledger level.

But by the time information reaches the GL, you may have lost the transaction-level detail needed to explain how a particular balance was actually arrived at. The GL can tell you the final financial position, but it may not be able to provide the granular accounting context behind it.

And that is precisely why a modern subledger is pertinent to any organisation: it becomes the bridge between what happened in the business and what ultimately gets reported in finance. And perhaps that is why the subledger deserves more attention than it traditionally receives.

The CFO may never see the subledger. But the quality of the financial decisions they make depends on the quality of the financial foundation underneath it.