Management's influence on the proper closing of the financial year

This article answers the following questions:

• What should be considered when closing the financial year?
• Why should the management board be involved in year-end closing activities?
• How can senior management support finance departments in preparing financial statements?

Each year, with the arrival of autumn, comes the time to summarise the past three quarters and reflect on what the end of the current financial year will look like from a business perspective and what the next one may bring. In a well-managed organisation, this is not only a moment for comparing actual results with forecasts, but also for reflection and drawing conclusions for the future. How should entities carry out the process of closing their accounting books so that the data collected at year-end can truly support the organisation’s further development?

How to prepare a company for year-end closing?

Firms providing financial audit services observe that senior management in many entities focuses primarily on business development, without sufficiently engaging in the process of building reliable financial reporting. Yet financial reporting is an inseparable part of running a business. One could even say that properly maintained accounting books are the entity’s business card – tying together all activities and operations and summarising them effectively through the financial statement.

A key factor in ensuring transparency and reliability in all types of accounting summaries – even those not directly related to year-end closing – is, of course, a properly documented accounting and financial reporting policy. We have previously written about why it is worth implementing such a policy and what errors it helps avoid in an article dedicated to examining transactions in financial statements.

However, for an entity to implement an accounting policy and other solutions and procedures that allow full utilisation of the information gathered during year-end closing, a decision must be made at the management level to place greater emphasis on the quality of financial reporting activities.

If management boards of companies (and their supervisory bodies) are unaware of the essence of accounting, fail to understand the rationale behind preparing financial statements, and do not recognise the importance of both external and internal audits, the financial data processed by finance and accounting departments will be significantly flawed or, at the very least, will not clearly and accurately reflect all economic events.

If management does not analyse the information collected during year-end closing and does not draw conclusions from previous financial audits, it is unrealistic to expect this from finance and accounting departments. Today, it is precisely the management boards and supervisory boards that bear a special responsibility, as the legal and regulatory environment in Poland and globally is constantly evolving.

How to increase the efficiency of year-end closing activities?

Auditors observe annually that companies in Poland tend to neglect financial reporting unless management is compelled to act by public opinion or significant investor interest in the entity’s situation. Due to insufficient disclosures in hastily prepared financial statements (or errors within these documents) entities may overlook critical warning signs regarding the contents of their books. The most common causes of issues identified during financial statement audits include:

• prioritising tax law over accounting law – entities often treat accounting law guidelines as secondary, resulting in improper data presentation due to the lack of enforcement of criminal sanctions under the Accounting Act and the Commercial Companies Code¹,
• insufficient knowledge (and/or engagement) of management boards and supervisory bodies in matters related to preparing reliable financial reporting,
• incorrect selection of audit procedures, which prevents statutory auditors from identifying significant irregularities or verifying the completeness of disclosures of material information in the financial statement,
• lack of organisational readiness for new reporting requirements (e.g. ESG reporting).

The period of closing the financial and tax year is not only a time of intense work for the accounting department, but above all the beginning of a process in which the management board and supervisory board should actively participate. It is senior management that should draw conclusions from previous audits and ensure that financial data processed by finance and accounting departments accurately and clearly reflect all economic events. These bodies should also make every effort to ensure that the company’s financial statement is free from any significant errors that would later require auditor correction.

We have already discussed the most common errors in financial statements in a separate article, so to conclude, we wish all accountants and financial directors success in avoiding such issues within their organisations.

Let us remember that the best way to avoid such problems is through a proper level of knowledge and the engagement of management boards and supervisory bodies at the right stage of building financial reporting procedures.

¹ Refers to the provisions contained in Articles 77 and 79 of the Accounting Act (consolidated text: Journal of Laws 2023, item 120, as amended).