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Why is reporting still such a headache in the maritime sector?

Why is reporting still such a headache in the maritime sector?

Pinelopi Kassani

Article by Pinelopi Kassani, Partner - Governance Risk & Compliance at Moore Greece, in Naftika Chronika.

The maritime sector is no stranger to advanced technology and digital transformation is well under way. Significant investment goes into the navigation, safety, communications and other core systems aboard the vessels, as well as into their monitoring, ashore. Land operations such as chartering, purchasing, planned maintenance, MGA and accounting have followed suit in the digital era. 

But what about financial reporting? Ever expanding with new requirements and also so crucial to decision making, how has this area been left so far behind in the inevitable journey of digitalization? 

One obvious answer would be the necessity for vessel owning companies to prioritize other investments so that they are kept abreast with new safety and environmental requirements and ahead of the competition. Ballast water treatment systems, scrubbers, cybersecurity are only a few of the significant investments that maritime companies needed to prioritize in the recent past. 

Another reason would seem to be the fact that the accounting and financial reporting functions of most private maritime companies employ a small number of professionals that need to meet the informational needs of a large number of stakeholders, primarily management, investors and lenders. Usually, these professionals have to combine information from the company’s accounting books and records with other information that they keep externally, in order to produce management reports, budgets, cashflow analyses, KPIs and financial statements. This compilation exercise is usually manual to a large extent, involves judgement and includes a large number of information which is retrieved from a range of different sources. 

Numerous attempts to streamline reporting though specialized software have largely failed simply because (a) significant investment is needed so that the software providers can build sufficient understanding of maritime operations and reporting needs and (b) the flow of operations differs significantly among private companies and so the tailoring costs would render the investment economically unsustainable.   

Hence, the lack of digitalized financial reporting creates the following inevitable problems that are common across the private shipping sector:
  • Information is simply not available on time: There may be significant time that needs to be spent to compile information. Sometimes the request for information is an urgent one because the financial information is intended to help support a crucial business decision. Inevitably, the unavailability of sufficient reliable information, may actually result in inability to make an informed decision, timely. 
  • Inability to catch up with new requirements: As the reporting requirements are increasing, with the obvious example being the introduction of ESG reporting, it is essential to start thinking about streamlining the reporting processes to make them both robust and efficient, while ensuring that adequate reliable sources are identified to provide data for the new reporting requirements. To source ever increasing information through purely manual processes will surely result in a collapse of the financial reporting function.
  • Heavy reliance on specific members of staff: The credibility of the information is largely dependent on the knowledge and experience of the preparer as well as the diligence and attention of the reviewer. Needless to say that unplanned absence of key staff within accounting may delay the delivery or hinder the quality of financial reporting.
  • Susceptibility to human errors: Financial and non-financial information included in reporting is susceptible to human errors which can be very difficult to detect. Mistakes are overall expected in largely-manual processes, however, the more significant or frequent the mistakes, the more likely it is for the users of the information to mistrust the preparers.
  • Inconsistencies in reporting over time: There is a high likelihood that the information is inconsistently prepared among reporting periods, which may affect the comparability of the information over time. To ensure consistent preparation, the same sources of information must be used and similar assumptions must be made, each time. It also means that the models used to derive the information are also mathematically consistent to one another.
  • Multiplication of effort: Even if the model calculations are already prepared in spreadsheets, the compilation and verification of the information takes time. Usually, financial information is extracted from an accounting software. It is then adjusted using information from other sources and then input in the end report to be shared with stakeholders. This takes place every time that such a report is needed. Essentially it is a repetitive process.   
  • Inability to directly drill down to the granular detail: The breakdown of the compiled information is not usually readily available and therefore it is an extra effort from the accounting or the financial reporting function, if follow up questions need to be addressed, especially regarding the transactions that are summarized in the report they have compiled. Such questions may also pose a challenge on the basis of the preparation of the reports, therefore creating stress to the people in charge of financial reporting.
  • Lack of internal control: The reliance on manual processes for the production of information which is crucial for decision-making may impose significant risks for the company.  Hidden errors or inconsistencies that are impossible to detect may result in a break of the reporting process. Such huge gaps in internal control may even create opportunities for fraudulent activities. Even if such incidents do not emerge, significant breaks in the internal controls relevant to financial reporting will definitely be picked up by auditors, making the audit process difficult to conclude positively for the company. 

All of the above tend to repeat themselves in a vicious cycle that only results in both the frustration of overloaded accountants and the discontempt of management and stakeholders. 

How could we possibly put an end?

We believe there are really three pillars to build a robust financial reporting function:  
  • A proactive take on the needs of the key stakeholders: It is crucial that management recognizes (a) the need for and (b) the risks arising from the lack of effective financial reporting. To successfully set up this function requires a mindset that anticipates the informational needs of the stakeholders and designs and implements processes relevant to reporting. Pro activeness in embedding new requirements in existing reporting processes is also key in making those processes withstand the test of time.
  • Choosing of the right software solutions: Most companies include a number of software solutions in their information technology environment. Reporting is usually done on spreadsheets. Companies can draw the information directly from the underlying systems and databases and auto-feed them to their preset customized reports, real time. Not all accounting software offers this option and many ERP solutions are not tailored for maritime. So, the only way is to be extra careful to select reputable international ERP solutions, with reporting functions already embedded, specifically tailored for maritime by people who understand maritime operations. This means that companies can set up their financial reporting once and then rest assured that it will be created timely, consistently and error-free, since manual intervention will be nearly eliminated. Except from the benefits of the timeliness and reliability of information, these solutions free-up a significant amount of time from the finance function, while improving the timeliness, transparency and reliability of financial reporting.   
  • Continuous people development and support: As reporting requirements increase, finance function professionals need training and support to be able to produce quality financial reporting in new areas such as ESG. The better the people are equipped with knowledge and experience, the more meaningfully they can utilize the available tools and technology to prepare financial information that is most relevant to its purposes.   

With a growing need for faster and more reliable sourcing of information, financial reporting will inevitably follow the example of other maritime business processes which have become more streamlined and more automated over a short period of time. The technology exists and specialized maritime accounting software solutions with embedded financial reporting functionality offer highly customizable reports, aimed to cover the reporting needs of all groups of stakeholders, timely. The era where management reports took weeks to prepare, after the period end, is –thankfully- long gone!