Accounting, Financial, Taxation

Following on my previous post (Evolving Problems In Revenue Recognition), the following controls can be used to spot transactional errors or attempts to alter the reported level of revenue for the standard revenue recognition systems:

Investigate all journal entries increasing the size of revenue. Any time a journal entry is used to increase a sales account, this should be a “red flag” indicating the potential presence of revenues that were not created through a normal sales journal transaction. These transactions can be legitimate cases of incremental revenue recognition associated with prepaid services, but can also be barter swap transactions or fake transactions whose sole purpose is to increase revenues. It is especially important to review all sales transactions where the offsetting debit to the sales credit is not accounts receivable or cash. This is a prime indicator of unusual transactions that may not really qualify as sales. For example, a gain on an asset sale or an extraordinary gain may be incorrectly credited to a sales account that would mislead the reader of a company’s financial statements that its operating revenues have increased.

Compare the shipping log and shipping documents to invoices issued at period-end. This control is designed to spot billings on transactions not completed until after the reporting period had closed. An invoice dated within a reporting period whose associated shipping documentation shows the transaction as having occurred later is clear evidence of improper revenue reporting. If invoices are based on services instead of goods provided, then invoices can be matched to service reports or timesheets instead.

Issue financial statements within one day of the period-end. By eliminating the gap between the end of the reporting period and the issuance of financial statements, it is impossible for anyone to create additional invoices for goods shipping subsequent to the period-end, thereby automatically eliminating any cutoff problems.

Compare customer-requested delivery dates to actual shipment dates. If customer order information is loaded into the accounting computer system, run a comparison of the dates on which customers have requested delivery to the dates on which orders were actually shipped. If there is an ongoing tendency to make shipments substantially early, there may be a problem with trying to create revenue by making early shipments. Of particular interest is when there is a surge of early shipments in months when revenues would otherwise have been low, indicating a clear intention to increase revenues by avoiding customer-mandated shipment dates. It may be possible to program the computer system to not allow the recording of deliveries if the entered delivery date is prior to the customer-requested delivery date, thereby effectively blocking early revenue recognition.

Compare invoice dates to the recurring revenue database. In cases where a company obtains a recurring revenue stream by billing customers periodically for maintenance or subscription services, there can be a temptation to create early billings in order to record revenue somewhat sooner. For example, a billing on a 12-month subscription could be issued after 11 months, thereby accelerating revenue recognition by one month. This issue can be spotted by comparing the total of recurring billings in a month to the total amount of recurring revenue for that period as compiled from the corporate database of customers with recurring revenue. Alternatively, one can compare the recurring billing dates for a small sample of customers to the dates on which invoices were actually issued.

Identify shipments of product samples in the shipping log. A product that is shipped with no intention of being billed is probably a product sample being sent to a prospective customer, marketing agency, and so on. These should be noted as product samples in the shipping log, and the internal audit staff should verify that each of them was properly authorized, preferably with a signed document.

Verify that a signed Acknowledgment of Bill-and-Hold Transaction has been received for every related transaction. If a company uses bill-and-hold transactions, then this control is absolutely mandatory. By ensuring that customers have agreed in advance to be
billed for items to be kept in the company’s warehouse, one can be assured of being in compliance with the strict GAAP rules applying to these transactions. Also, a continual verification of this paperwork (shown earlier in Exhibit 1-2) will keep managers from incorrectly inflating revenues by issuing false bill-and-hold transactions.

Confirm signed Acknowledgment of Bill-and-Hold Transactions with customers. If a company begins to match bill-and-hold acknowledgment letters to invoices issued to customers (see last control), the logical reaction of any person who wants to fraudulently continue issuing bill-and-hold invoices is to create dummy acknowledgments. Consequently, it is useful to contact the persons who legedly signed the acknowledgments to verify that they actually did so.

Do not accept any product returns without an authorization number. Customers will sometimes try to return products if there is no justification required, thereby clearing out their inventories at the expense of the company. This can be avoided by requiring a return authorization number, which must be provided by the company in advance and prominently noted on any returned goods. If the number is not shown, the receiving department is required to reject the shipment.

Compare related company addresses and names to customer list. By comparing the list of company subsidiaries to the customer list, one can determine if any inter-company sales have occurred and whether these transactions have all been appropriately backed out of the financial statements. Since employees at one subsidiary may conceal this relationship by using a false company name or address, one can verify the same information at all the other subsidiaries by matching subsidiary names and addresses to their supplier lists, since it is possible that the receiving companies are not trying to hide the inter-company sales information.

Require a written business case for all barter transactions. Require the creation of a business case detailing why a barter transaction is required and what type of accounting should be used for it. The case should be approved by a senior-level manager before any associated entry is made in the general ledger. The case should be attached to the associated journal entry and filed. This approach makes it less likely that sham barter swap transactions will be created.

Verify that cash-back payments to customers are charged to sales. Compare the customer list to the cash disbursements register to highlight all cash payments made to customers. Investigate each one and verify that the revenue account was debited in those instances where cash-back payments were made. This should not apply to the return of overpayments made by customers to the company.

Create a revenue accounting procedure to specify the treatment of gross or net transactions. When a company deals with both gross and net revenue transactions on a regular basis, there should be a procedure that clearly defines for the accounting staff the situations under which revenues shall be treated on a gross or net basis. This reduces the need for internal audit reviews (see next control) to detect revenue accounting problems after the fact.

Review the revenue accounting for potential pass-through transactions. In situations where there is either an extremely high cost of goods sold (indicating a possible pass-through transaction) or where there is no clear evidence of the company’s acting as principal, taking title to goods, or accepting risk of ownership, the internal audit staff should review the appropriateness of the transaction.

Trace commission payments back to underlying sale transactions. One can keep a list of all business partners who pay the company commissions, and run a periodic search on all payments made by them to the company. The internal audit staff can then trace these payments back to the underlying sales made by the company and verify that they were recorded at net, rather than at gross.

I realize the controls noted here are not comprehensive enough to cover revenue recognition of every kind of business operations; additional controls will be listed in subsequent entries I am going to post in the future that apply to more detailed revenue recognition scenarios.

Payroll control is one of the biggest controlling aspect in financial and accounting field after the cash and inventory (finished good and raw material). Why? Quiet straight forward reason; payroll or wages takes the second biggest portion of the “Cost Of Goods Sold” allocated in every company (or business in general) after the inventory. So, payroll control should be one of main focus of the controlling task of any financial managers, accounting manager, controllers, and the CFOs or the business owner (in a small business). Loosing control on the payroll system would lead a company into a big risk.

Unless you know what control you should apply to the payroll system, controlling this activities (read: transaction) could be a super complicated (yet tricky) task that you can not even imagine. You should understand the nature and flow of a payroll process. I know, you may not literate with human resource filed. It is not your expertise, yes so do I, but as a financial manager or controller, you should be familiar (hence become literate) with the payroll transaction and its nature. In this post, I am going to provide you set of control that will cover nearly every aspect of payroll system, such as: basic payroll system control, computerized timekeeping controls, computerized payroll system controls, payroll self-service controls, electronic payroll payment controls, cash payroll payment controls, electronic payroll remittance controls, and outsourced payroll controls.

Basic Payroll System Control

Controls are required for nearly every aspect of the basic payroll system, covering hours to be paid, deductions, pay rates, tax remittances, and pay distributions. The controls are as follows:

Verify time card receipt - The payroll staff will match received time cards against the current employer list and investigate all missing time cards.

Obtain approval for hours worked - The payroll staff will obtain the written approval of supervisors for hours worked by their direct reports, including overtime hours.

Obtain approval of pay rate changes - The payroll staff will obtain the written approval of a high-level manager on the standard pay change form for all changes in pay rates.

Obtain approval of negative deductions - The payroll manager will approve all negative payroll deductions.

Obtain approval of payroll advances - An employee’s immediate supervisor and the controller will approve any request for a payroll advance.

Review wage and tax calculations. A second payroll clerk will review the payroll wage and tax calculations for errors, and adjust any errors found.

Match payroll register to authorizing documents. A second payroll clerk will compare the payroll register to authorizing deduction forms, pay requests, change forms, and so on to ensure that all components of the payroll were properly authorized.

Issue checks directly to recipients. The paymaster will require a photo identification before issuing paychecks to employees, and require recipients to sign for checks received.

Retain unclaimed paychecks. The paymaster will retain an employee’s check in a secure location until the employee is personally available to receive it.

Segregate the paymaster function. The paymaster will not have responsibility for any other payroll activities.

Review un-cashed payroll checks. The paymaster will follow up with employees regarding un-cashed paychecks.

Review tax remittances. A second payroll clerk will review the amount of tax remittances and the completeness of accompanying remittance documents prior to the remittances being delivered to the government.

Remit taxes on a timely basis. The payroll manager will ensure that all payroll taxes are remitted to the appropriate government entities on a timely basis.

Review outstanding advances. The payroll staff will regularly review the repayment status of all outstanding pay advances.

Limit access to completed change authorization forms. The payroll clerk will store signed payroll change authorization forms in a secure location to reduce the risk of subsequent document modification.

Issue paycheck list to department managers. The paymaster will issue a list of paychecks distributed to the department managers, with instructions to search the list for ghost employees.

Reconcile the payroll bank account. The controller will reconcile the payroll bank account and investigate any variances.

Audit pay deductions. The internal audit staff will periodically compare deduction authorizations to the actual deductions being taken from employee pay, and investigate any variances.

Audit no-deduction paychecks. The internal audit staff will periodically search for paychecks having no deductions, and determine if these are being written for ghost employees.

Audit employee addresses. The internal audit staff will periodically search for matching employee addresses on multiple paychecks, and determine if multiple instances of the same address are caused by employees fraudulently paying themselves through ghost employees.

Compare tax forms to pay documentation. The internal audit staff will periodically match year-end employee tax forms to employee pay change authorizations and termination documentation, and investigate any variances.

Compare payroll payments to human resources files. The internal audit staff will periodically verify that human resources files exist for all employees being paid, and investigate any missing files.

Review paychecks for double endorsements. The internal audit staff will periodically review a selection of paychecks for double endorsements, indicating the possible use of ghost employees.

Compare the payroll salary budget to actual expenditures. The internal audit staff will match the expected payroll as outlined in the budget to actual payments, and investigate any differences.

Computerized Timekeeping Controls

Controls for computerized time clocks are used to ensure that the correct numbers of hours are recorded by the employees who actually worked the recorded hours. The controls are as follows:

Time clock controls employee hours. The computerized time clock will block out hours when employees are allowed to clock in or out.

Time clock requires overtime approval. The computerized time clock will require a supervisory approval code before an employee can record overtime hours.

Review time clock reports. The payroll clerk will review time clock exception reports for such items as missed punches, late punches, and overtime hours worked, and investigate problems as necessary.

Use biometric clocks. Biometric clocks will not allow time recording by anyone but people specifically

 Identified as being current employees. Link photo images of employees to badge scanner. An electronic camera will record the image of each employee as they enter time in the time clock, which the payroll clerk will monitor to detect buddy punching.

Review hours worked. Supervisors will regularly review time clock reports itemizing hours worked by employee, and investigate any unusual amounts.

Computerized Payroll System Controls

Controls in a computerized payroll system should incorporate many of the controls already noted for a manual system, but can be streamlined in the area of timekeeping controls. The controls are as follows:

Restrict access to the employee master file. The computer system will restrict access to the employee master file to authorized employees.

Automatic reporting of missing time cards. The computer will automatically compare the employee master file to submitted time cards, and report on employees for whom no timecard has been received.

Compare time card totals to data entry totals. A non-data entry person will compare keypunched employee time records to time cards for data entry errors, and correct any errors found.

Review payroll register for errors. The payroll staff will compare source documents to the payroll register report, and correct any errors found.

Independent review of payroll register. The payroll manager will independently print the payroll register and review it for evidence of improper payments.

Review exception reports. The payroll manager will print and review computergenerated exception reports, addressing such areas as negative deductions, as well as unusually large base pay, overtime, or hours being paid, and investigate as necessary.

Send a manual check copy to the general ledger clerk. The payroll staff will copy each manual check created and forward it to the general ledger clerk for recording in the general ledger.

Audit employee master file. The internal audit staff will periodically determine if all employees listed in the employee master file are actual employees who are currently employed, and investigate any differences.

Payroll Self-Service Controls

When payroll self-service systems are used, all related controls are automated, and center
on data entry issues and user notifications. The controls are as follows:

Limit the pre-allowed amount of pay rate changes. The self-service system will impose restrictions on the amount of pay raises that managers can grant employees, above which supervisory approval is required.

Send change verification e-mails. The self-service system will automatically send an e-mail message to the person initiating a payroll change, verifying the change made.

. The self-service system will notify the controller by e-mail if the bank account information for any employee is changed.

Reject entry of unauthorized residency states. The self-service system will reject the entry of a state of residence for which the company is not set up to record state income or unemployment tax remittances, and notify the payroll staff.

Link termination information to self-service system. The human resources system will be linked to the payroll self-service system, so that entry of termination information by the human resources staff will automatically shut down access to the payroll self-service system.

Cash Payroll Payment Controls

When employees are paid their wages in cash, strong controls are required to ensure that the correct amount of cash is received by the intended recipient. The controls are as follows:

Complete pay envelope information in ink. The payroll clerk will write employee pay information on the pay envelope in ink to avoid subsequent modification of pay amounts.

Match payroll register to pay envelopes. A second clerk will compare the payroll register to the pay amount listed on each pay envelope, investigate any differences, and initial each correct envelope.

Complete cash requirements form in ink. The payroll clerk will complete a cash requirements form (on which specific bill and coin amounts are requested) in ink to avoid subsequent modification.

Require approval of the cash requirements form. The payroll manager will review and approve each completed cash requirements form before cash is issued.

Casher retains copy of cash requirements form. The cashier will retain a copy of the cash requirements form once cash has been issued.

Count and sign for received cash. The paymaster will count cash received from the cashier and match the amount received to the cash requirements form prior to signing for receipt of the cash.

Employee signs pay receipt. Each employee being paid will count the cash received from the paymaster and match it to the pay amount listed on the pay envelope prior to signing for receipt of the cash.

Electronic Payroll Payment Controls

The primary controls over electronic payments are the proper authorization and verification of electronic payment information. The controls are as follows:

Require electronic payments. The human resources manager will enforce the use of direct deposit or payroll card payments to all employees.

Match routing and account numbers on employee check to submitted information. The payroll clerk will verify that the routing and account numbers on the check accompanying any employee request for direct deposit payment match the corresponding numbers entered in the payroll software.

Require direct deposit verification. The payroll clerk will not process a change to an employee’s direct deposit information without the employee’s signature and formal identification.

Securely store direct deposit authorization forms. The payroll clerk will store all completed direct deposit authorization forms in a locked cabinet.

Investigate multiple payments to the same bank account. The payroll manager will periodically print a computer report itemizing all bank accounts referenced multiple times in the payroll database, and investigate any payments from multiple employees to such accounts.

Electronic Payroll Remittance Controls

When payroll remittance information is provided online, there is no risk of asset loss, but there is a risk of inappropriate access to personal information, which is mitigated by the following control:

Require user verification. Employees will create user identification and password information for access to their online payroll remittance and W-2 accounts.

Outsourced Payroll Controls

When the payroll function is outsourced, the key additional controls are to verify that the supplier is indeed remitting taxes, and that paychecks are still routed through the company paymaster. These controls are shown below:

Obtain verification of tax remittances. The payroll manager will obtain receipts for all tax remittances made by the payroll supplier and match them to required remittance information.

Route incoming paychecks through a paymaster. The payroll supplier will send all employee paychecks to a paymaster rather than directly to employees; the paymaster will verify the existence of each employee prior to issuing the paychecks.

This post offers an essential checklist for accountants in fulfilling their functions for managers. Accountants are saddled with the several functions listed below, and under the pressures of time they may end up giving short shrift to their duties to managers — which is understandable. However, the very continuance of the business depends on accountants providing managers information they need to know for making decisions and maintaining control. If managers don’t get what they need from their accountants, the business could fail or spin out of control. In this sense, management accounting functions are the most central — if the business fails, the other accounting functions are beside the point.

In a business, accounting has several functions. The responsibilities of the chief accountant and the accounting department include the following:

1. Complying with the manifold requirements of income taxes, sales taxes, property taxes, and payroll taxes.
2. Designing and operating a system to capture, record, process, and store all relevant documents and information about the financial activities of the business.
3. Ensuring the integrity and reliability of the information system, and preventing fraud from inside and outside the business (the latter being directed at the business).
4. Preparing financial statements that are reported outside the business to its lenders and shareowners (If the business is a public company, the accountants are also responsible for preparing filings with the Security and Exchange Commission).
5. Preparing financial statements and accounting reports for distribution to the business’s managers for their planning, control, and decision-making needs.

The last functions listed below are referred to as “management OR managerial accounting“. It concerns accounting’s role in helping business managers carry out their functions.

Designing Internal Accounting Reports

In designing internal accounting reports for managers, the accountant should ask, “Who’s entitled to know what?” Generally speaking, the board of directors, the chief executive officer, the president, and the chief operating officer are entitled to know anything and everything. This sweeping comment is subject to exceptions in business organizations that tightly control the flow of financial information. By virtue of their positions, the financial vice president and the controller have access to all financial information about the business.

Other managers in a business have a limited scope of responsibility and authority. The accountant should report to them the information they need to know, but no more. For example: the vice-president of production receives a wide range of manufacturing information but doesn’t receive sales and marketing information. The accountant should identify a particular manager’s specific area of authority and responsibility in deciding the information content of accounting reports to that manager. The reporting of information to individual managers should follow the organizational structure of the business; this practice is called “responsibility accounting”.

From the accounting point of view, the organizational structure of a business consists of profit centers and cost centers:

1. A profit center could be a product line, or even a specific product model. For example, a profit center for Apple Computer is its iPod line of products; another profit center is its iTunes Music Center (where customers download audio and video files). Within each broad product line, Apple has sub-profit centers. For example, each type of iPod is a sub-profit center.
2. A cost center is an organization unit that doesn’t directly generate sales revenue. For example, the accounting department of a company is a cost center.
3. The accounting reports that go to the manager of a profit center should be oriented to the profit performance of that organization unit. The accounting reports that go to a manager of a cost center should be oriented to the cost performance of that organization unit.

Helping Managers Understand Their Accounting Reports

Most managers have limited accounting backgrounds; their backgrounds are usually in marketing, engineering, law, human resources, and other fields. Not to sound critical, but most business managers have their desires to learn accounting under control. Furthermore, they’re very busy people with little time to spare. Yet, accountants often act as if managers fully understand the accounting reports they receive and have all the time in the world to read and digest the detailed information they contain. Accountants are dead-wrong on this point.

One of the main functions of the management accountant is to serve as the translator of accounting jargon and reports to business managers — to take the technical terminology and methods of accounting and put it all into terms that non-accounting managers can clearly understand. Of course, being a controller for years (became more generalist rather than specialist as accounts are), I may be biased, but I believe that management accountants can perform a very valuable service by improving their communication skills with non-accounting managers.

Involving Managers in Choosing Accounting Methods

Some business managers take charge of every aspect of the business, including choosing accounting methods for their businesses. But many business managers are passive and defer to their chief accountants regarding the accounting methods their businesses should use. In my opinion, the hands-off approach is a mistake.

Ultimately, the chief executive officer (CEO) of the business is responsible for these decisions, as he or she is responsible for all fundamental decisions of the business. But such accounting decisions may not be on the radar screen of the chief executive.

In choosing accounting methods, the chief accountant shouldn’t allow managers to sit on the sidelines and be spectators. The chief accountant shouldn’t select an accounting method without the explicit approval and understanding of top-level managers. In particular, the head accountant should explain the differences in profit and asset and liability values between alternative accounting methods. The business’s accounting methods should reflect its philosophy and strategies, so if the business is conservative in its policies and strategies, it should use conservative accounting methods.

The chief accountant can find himself or herself between a rock and a hard place when top-level managers intervene in the normal accounting process. This interference may be referred to as massaging the numbers, managing earnings, smoothing earnings, or good old fashioned accounting manipulation. If the accountant accedes to management pressure, he or she should make clear to the manager what the consequences will be the following year.

Generally speaking, there’s a compensatory effect, or trade-off, between years; pumping up profit this year, for instance, causes profit deflation next year. Massaging the numbers produces a robbing Peter to pay Paul effect, and the accountant should make this very clear to the manager.

Designing Profit Performance Reports for Managers

The accountant needs to read the mind of the manager in designing the layout and content of reports to the manager. Ideally, the profit report should reflect the manager’s profit strategy and tactics. For example: a manager of a profit center focuses on two main things — margin and sales volume. Therefore, the profit report should emphasize those two key factors. It sounds simple enough, but one impediment exists in designing internal profit reports for managers based on management thinking.

In designing internal profit reports for managers, accountants too often follow the path of least resistance. They use the format and content of the income statement reported outside the business, but this won’t do. An external income statement conceals as much information as it reveals. External income statements don’t disclose information about margins and sales volumes for each profit center of the business.

The accountant has to break out of his or her external income statement mentality and think in terms of what managers need to know for analyzing profit performance and making profit decisions. My main advice on this point is straightforward: Listen to how the manager explains his or her profit strategy, which is called the “business model”. Get inside the manager’s head. Do your best to understand the mindset of the manager regarding how he or she sees the formula for making profit. Listen carefully to which particular factors the manager thinks are the most important drivers (determinants) of profit. Don’t try to remodel the manager’s thinking into the accountant’s way of thinking. Don’t forget that the manager is the boss — even though you might think the manager should go back and learn accounting.

In short, don’t try to educate the manager on accounting; let the manager educate you on what he or she needs to know in order to make profit.

Designing Cash Flow Reports for Managers

The conventional statement of cash flows is far too technical and intimidating for most managers to make sense of. What managers don’t understand, they don’t use. In my view, accountants are too bound by their “debits and credits” thinking when it comes to the statement of cash flows. The statement of cash flows is designed to reconcile changes in the balance sheet during the period with the amounts reported in the statement. But, should this function also be the purpose of reporting this financial statement to managers? I don’t think so.

In mid-size and large businesses, the financial officers of the business manage cash flow. Other managers don’t have any direct responsibility over cash flow — although their decisions impact cash flow. Managers of profit and cost centers should have a basic understanding of the cash flow impacts of their decisions. They don’t necessarily need cash flow statements, but they need to know how their decisions impact cash flow.

The cash flow reports to managers of profit and cost centers should focus mainly on the key factors that affect cash flow from operating activities. These internal management reports should concentrate on changes in accounts receivable, inventory, and operating liabilities (accounts payable and accrued expenses payable). These are the main factors for the difference between cash flow and profit that the managers of profit and cost centers have control over and responsibility for.

Designing Management Control Reports

Management control is usually thought of as keeping a close watch on a thousand and one details, anyone of which can spin out of control and cause problems. First and foremost, however, management control means achieving objectives and keeping on course toward the goals of the business. Management control covers a lot of ground — motivating employees, working with suppliers, keeping customers satisfied, and so on. But there’s no doubt that managers need control reports that include a lot of detail.

The trick in management control reports is to separate the wheat from the chaff. Being very busy people, managers can’t afford to waste time on relatively insignificant problems. They have to prioritize problems and deal with the issues that have the greatest effect on the business. Therefore, the accountant should design management control reports that differentiate significant problems from less serious problems. In control reports, the accountant should use visual pointers to highlight serious problems. In other words, control reports shouldn’t be flat, with all lines of information appearing to be equally important.

Developing Models for Management Decision-Making Analysis

For decision-making purposes, business managers need a model of operating profit that, theoretically, fits on the back of an envelope. Here’s an example of such a compact profit model, which I adapted from the “Contribution—Margin—Minus—Fixed Costs Analysis method” with the following formula:

(Unit Margin × Sales Volume) – Fixed Expenses = Operating Profit

Suppose the sales price is $100 and variable costs equal $65 per unit. Therefore, unit margin is $35. Assume the business sells 100,000 units, so its total contribution margin for the period is $3,500,000 ($35 unit margin × 100,000 units = $3,500,000 total contribution margin).

Last, assume its fixed expenses for the period equal $2,500,000. So its operating profit is $1,000,000 for the period.

The accountant should develop a condensed profit model, which is limited to the critical factors that tip profit one way or the other. This profit model helps the manager focus on the key variables that drive profit behavior. For example: continuing with the example just mentioned, suppose the manager is contemplating cutting sales price 10 percent to boost sales volume 20 percent. Using the profit model the manager can quickly do a before and after comparison of the proposed sales price cut:

Before: ($35 unit margin × 100,000 units) – $2,500,000 fixed expenses = $1,000,000 operating profit

After: ($25 unit margin × 120,000 units) – $2,500,000 = $500,000 operating profit

Giving up 10 percent of sales price for a 20 percent gain in sales volume may have intuitive appeal, but this decision would cripple profit. Operating profit would drop from $1,000,000 to only $500,000; the manager would give up $10, or 29 percent of the $35 margin per unit. The sacrifice is too great in exchange for only 20 percent gain in sales volume.

Working Closely With Managers in Planning

One of the most important managerial functions has two parts: forecasting changes that will affect the business and planning the future of the business. This task includes plotting the sales trajectory of the business, the need for additional capital, and shifts in size and makeup of its workforce and other factors. The accountant should be involved in the planning process from the get-go. Otherwise, the accountant is at a disadvantage in preparing budgets and financial projections. The better the accountant understands the planning process, and the closer the accountant works with managers in developing plans, the more useful the financial forecasts and budgets will be.

Establishing and Enforcing Internal Controls

Internal controls are the forms and procedures established in a business to deter and detect errors and dishonesty. Internal control certainly isn’t the most glamorous accounting function in a business organization. Even if everyone in the business and everyone the business deals with are as honest as the day is long every day of the year, errors are bound to happen.

Here’s a nice real example: One of my personal client recently started receiving retirement income from the organization that manages his retirement investment account. He completed a rather lengthy form giving the organization all the information it asked for, and being an accountant, I appreciated that it needed all this information. He has no problem with that, anyway. But the organization made a data input error, entering his wife’s year of birth as 1965 instead of 1945. This is called a “transposition error“, and it’s a common error in accounting systems.

Every business should have internal control procedures in place to prevent, or at least to quickly catch, this type of error. Fortunately, I caught the error when he shown his document during our last meeting (he wanted me to check about why he received such low amount). I called the error to the company’s attention, and it took 15 telephone calls and over two months to get the error corrected! What bothered me is that the company didn’t have internal control procedures in place to prevent or to quickly catch the error.

Back to the main topic…. Well, a business is the natural target of all sorts of dishonest schemes and scams by its employees and managers, its customers, its vendors, and others. To minimize its exposure to losses from embezzlement, pilfering, shoplifting, fraud, and burglary, the accountant should establish and enforce effective internal controls in the business. As my uncle once said, “There’s a little bit of larceny in everyone’s heart.” Internal controls are an example of the principle that an ounce of prevention is worth a pound of cure.

Keeping Up-to-Date on Accounting, Financial Reporting, and Tax Changes

Accountants are very busy people because they carry out many functions in a business. Like business managers, they don’t have a lot of time to spare. One thing that gets short shrift in a crowded schedule is keeping up with changes in accounting and financial reporting standards. However, it’s absolutely essential that accountants stay informed of the latest changes. I personally recommand; Accountants simply have to set aside time to read professional journals, peruse Web sites, and keep alert regarding developments in accounting and financial reporting.