Accountants appear to regard the use of spreadsheets to consolidate the financial statements of listed companies as unusual and somewhat unsophisticated. It is also generally considered that companies, whether listed or unlisted, that use spreadsheets to perform the consolidation, are behind the times. This article will explore some of these sentiments and examine empirical evidence to demonstrate in which circumstances spreadsheets are appropriate and, conversely, when other types of solutions are more suitable as the principal consolidation application. This article is based on research in which self-completion questionnaires were distributed to the group accountants of JSE listed companies. 210 completed questionnaires were returned which yields a greater than 50% response rate, thus providing a representative sample of South African listed companies and consequently a reliable data set. The questionnaires were followed up by eight in depth interviews that provided a more detailed understanding of the design and use of consolidation systems as part of the consolidation process at JSE listed companies.

One point that emerged clearly from the research is that spreadsheets are used, almost universally, by accountants as an integral part of the process to prepare the consolidated financial statements of listed companies. However, the extent of reliance on spreadsheets during the consolidation process varies considerably. 62% of participants indicated that spreadsheets were the principal application which was used during the consolidation process. Consolidation modules that form an integral part of General ledger (GL) or ERP applications were used by 18% of participants, while 20% made use of specialised consolidation applications to consolidate the financial statements (Figure 1). However, even those companies who indicated that their principal consolidation application was either a GL/ERP, or a specialised consolidation application, also make widespread use of spreadsheets to complement their principal consolidation application. In such cases, spreadsheets facilitated a range of other consolidation functions such as the creation of management reports, reconciliation of inter-group transactions, the collection of additional disclosure information and the drafting of the annual financial statements. See figure 1.

The relatively high percentage of companies that relied exclusively on spreadsheets during the consolidation process was unexpected. This figure is particularly surprising when compared to the results of a 1996 survey of a sample of American companies, during which it emerged that merely 6% of respondents made exclusive use of spreadsheets to consolidate the financial statements, while 54% used specialist consolidation systems. The article, in which the results of the somewhat dated survey were published, unfortunately did not provide either any information regarding the size and the representativeness of the sample, or the profile of participating companies – such as the group turnover or the number of subsidiaries contained in the group. Consequently, it is difficult and possibly imprudent to make direct comparisons to or definite inferences from the results of the American survey. Nevertheless, it should be safe to conclude that the extent to which South African companies rely on spreadsheets during the consolidation process is greater than that of American companies.

However, empirical evidence suggests that valid reasons seem to exist for the widespread use of spreadsheets during the consolidation process. An analysis of the turnover of companies that use the three different groups of consolidation applications revealed a clear trend: Listed groups with a relatively small turnover tend to favour spreadsheets, while groups with relatively larger turnover use the consolidation module that forms part of the GL/ERP applications, and the groups with the largest reported turnover use specialised consolidation applications. Figure 2 presents the turnover of research participants according to the application type that was used during the consolidation process. The bars on the graph indicate the 10th to the 90th percentile range in reported group turnover, while the lines on the bars indicate the average. The graphs reveal that the 90th percentile of turnover for groups that use spreadsheets is R9.1 billion, while the turnover for GL/ EPR and specialised consolidation applications is R40.3 billion and R59.3 billion respectively. This apparent trend should neither be interpreted that listed companies with relatively large turnover make use of only specialised consolidation applications; nor that companies with relatively smaller turnover use spreadsheets exclusively. See figure 2.

An even clearer trend emerges when the extent of decentralisation in listed groups is considered in terms of the type of consolidation applications that are used. Group decentralisation refers to the number of entities in which the listed group is organised. Figure 3 presents the number of entities in the listed group according to the principal consolidation application type. The graph indicates that the 90th percentile of the number of entities in the groups that principally use spreadsheets is 69 entities, while the similar figure for GL/EPR and specialised consolidation applications types are 132 and 444 respectively. See figure 3.

It should again be noted that Figure 3 must neither be interpreted that decentralised groups make exclusive use of specialised consolidation applications, nor that more centralised groups always make use of either spreadsheets or GL/ERPs during the consolidation process. For example, one participant that uses a collection of spreadsheets to perform the consolidation, completed the process successfully and in a comparatively short period of time, despite having 250 entities in the group.

While it is certainly interesting to observe the clear trends that exist in the type of consolidation applications that are preferred by companies of certain turnover and extent of decentralisation, such statistics do not shed any light on actual manner in which the different types of consolidation systems are used. For example, it could be that even though specialised consolidation applications are capable of automatically eliminating the on-acquisition share capital of a subsidiary, such applications are not used to their full potential, resulting in the need to manually pass such consolidation adjustment entries. Three consolidation system characteristic scores were developed on the basis of a number of questions that were included in the questionnaire completed by the group accountants: Sophistication; Integration; and Formalisation.

Sophistication refers to the extent to which the consolidation system automates a number of functions that are integral to a year-end consolidation process, such as the elimination of inter group transactions; the calculation of the values that are contained in the consolidated group cash flow statement; and the translation at the appropriate exchange rate of values that are presented in a foreign currency. The maximum score that could be obtained for sophistication was 45, indicating a very sophisticated consolidation application. See Figure 4.

The coloured bars in Figure 4 represent the 10th to the 90th percentile of the sophistication scores obtained by listed companies that made use of the different types of consolidation system, while the lines on the bars indicate the average score. The first point that should be noted is that a significant variation exists in the sophistication scores obtained by companies that make use of the different types of consolidation systems. In other words, despite the potential of specialised consolidation applications to score high on the sophistication score, many companies that use such applications achieved a lower sophistication score than companies that exclusively use spreadsheets during the consolidation process. However, it is evident that many companies use the available functionality of specialised consolidation applications to render such systems more sophisticated than spreadsheets. It is also clear that specialised consolidation applications generally scored higher on the sophistication score than the other two groups of consolidation applications. See Figure 5.

Integration refers to the amount of automated data transfer between the sources of the consolidation data (such as the GL or the packs submitted by subsidiaries) and the consolidation application, and also the extent of automated data transfer from the consolidation application into reports (both management reports and the annual financial statements). The maximum integration score that could be obtained was 25, indicating a very integrated consolidation application where very little data is manually entered into the system and also that the reports are automatically populated with the consolidated data. It is clear from Figure 5 that, despite the large variations in scores obtained, companies that use specialised consolidation applications are generally more integrated than their counterparts that use spreadsheets during the consolidation process. However, consolidation modules that form part of a GL/ERP system are used as the most integrated type of consolidation system. This trend could be expected, since the consolidation module is an integral part of the GL/ERP and as a result, manual entering of data into the consolidation application should be limited. The integration of the consolidation system is important because it reduces the need for the menial re-entering of data and also because it diminishes the likelihood of errors taking place during the data transfer process due to human mistakes. Improved system efficiencies are particularly relevant in the South African context in the light of the acute skills shortage of qualified accountants. See Figure 6.

The formalisation score attempted to gauge the level of internal controls that operate within the consolidation system and in its environment. Included in the formalisation score are issues such as the control that exists over access to the consolidation system and how changes to the consolidation system are managed. The maximum formalisation score that could be obtained was 45. Figure 6 clearly demonstrates that spreadsheets are generally used in a more informal manner, where, for example, changes to the system are made without proper controls. GL/ERP type applications appear to be used in a more formalised manner when compared to spreadsheets, but specialised consolidation applications are generally used in the most formalised environment. A very clear theme that emerged from the detailed interviews with group accountants is that while the need for some level of internal controls is appreciated, the general sentiment regarding system formalisation is that it is often an ‘overkill’ and causes the consolidation process to be unnecessarily delayed. However, contrary to the perception that the formalisation of the consolidation system causes delays, empirical evidence clearly indicates that companies with a greater relative level of consolidation system formalisation are able to complete the consolidation phase of the year-end process more rapidly and are also able to publish their financial information on SENS before other companies with a similar number of entities in the listed group. It also emerged from the research that certain companies, where consolidation system formalisation is highly valued, consciously decided to reduce the consolidation system’s sophistication by manually performing certain functions that the system is capable of automating. The manual completion of such functions provides these companies with a greater level of control over the consolidation process, thereby enhancing the level of system formalisation.

Choosing the Right Horse
The choice of consolidation application is not straight forward, but some significant factors should be considered in the decision making process. The principal consideration in this process should be the number of entities that are contained in the group for which consolidated financial statements are prepared. Spreadsheets should be an adequate consolidation application for centralised groups, i.e. where the group consists of a small number of entities. Equally, spreadsheets are generally not the ideal consolidation tool for complex decentralised groups. In such cases, a specialised consolidation application or a consolidation module that forms part of the GL/ERP is more appropriate.

Affordability is another important consideration in the South African context. Generally, the use of a spreadsheet as the consolidation application has a zero marginal cost, since most companies would already have purchased the necessary license. When questioned regarding the choice of consolidation application, many interviewees noted that while another application might have been a closer match to the needs of the group, the cost of the ideal consolidation application was prohibitively expensive.

One other issue that should be considered in the process of deciding on the right consolidation application, is the extent to which the same general ledger and/or chart of accounts is used by entities in the group. It is clear from the research that a consolidation module that forms part of the GL/ERP application is the most appropriate for those groups that generally have a consistent general ledger and/or chart of accounts throughout the group. In such cases, the cost of making use of the consolidation module in the GL/ERP is insignificant and the potential for and ease of integration is considerably enhanced.

The choice of the most appropriate consolidation application is not clear-cut, but it is important to get right. Contrary to popular opinion, spreadsheets are often used in a sophisticated manner and are commonly the most appropriate consolidation solution for centralised groups of companies. Evidence indicates that a consolidation application that is properly designed, installed and used, not only contributes towards the ability of a company to reduce the cost of the year-end process, but also to improve the control over the consolidation process.

Pieter Smith CA(SA), MBA, is an independent financial consultant and a doctoral student at Durham University (UK).