In today’s column I want to talk about a common problem in companies both large and small, public and privately held. Even publicly held companies struggle to maintain accounting manuals with policies and procedures. You may ask why there is a need for concern. A concept we are all familiar with but often overlooked is ‘continuity’. For instance, the employee that knows how to write up prepays and enter them in the system as well as making any interest calculations is the only one that knows how it’s done. She’s the one that developed the process. However, unfortunately, a dispute arises over her salary and she turns in her notice. She’s not much help in training her replacement either. Now you are faced with trying to trace back her steps. Once you figure it out, wouldn’t it be wise to put the process in writing? I won’t even mention the cross training that could have taken place in years prior to her leaving. (That’s another column).
Let’s talk about the article that appeared in the January 14th edition of The Wall Street Journal’s CFO Journal, “Surprise! Audits Dig Deeper”(wsj.com/cfoj) . The premise of the article is that auditors for companies issuing audited financial statements are under pressure to test internal controls beyond what they have ordinarily tested. At the heart of that testing is documentation and the need for a transaction to have substance over form.
Quoting the article “Now, auditors are asking for more documentation, going line-by-line through budgets, sitting in on meetings to observe internal controls in action, and meeting with company accountants to understand their thinking when they signed a specific document.”
Even if your company does not have a requirement to provide audited financial statements, I would suggest you take heed of these audit changes. Think of your accounting documentation as a safety net. A good example of that is a written policy and set of procedures to set up a new vendor. Do you have one that your A/P Department can follow?
As a controller, one of the biggest challenges you have is the day to day management of accounting operations and risk. Just as in publicly held companies, if your transactional processes are not able to scale up for rapid growth or seasonal demands, internal controls will suffer. In the rush to push transactions through A/P policies may be ignored or forgotten because people are new or ill informed about how that works. In today’s environment, setting up a vendor can result in the perpetration of a fraud. It’s even possible to commit a violation of Homeland Security’s accounts payable version of a ‘No Fly’ list of companies and individuals banned from doing business in America. Who would have believed even ten years ago that vendor mismanagement could result in so much risk to a company.
If you are working for a startup, or a small company who is struggling to grow and thus has put internal controls and policies and procedures on the back burner, where do you start? I highly recommend ‘The Accounting Procedures Guidebook” by Steven M. Bragg. Steven Bragg writes prolificly for the accounting industry. The book is full of great information, forms and templates. It’s a small investment that can render a large payoff. It’s definitely one you want in your ‘controller toolbox’. And, for more in depth information on managing A/P there is always Mary Schaeffer who has published more on A/P than any other other author I know. (www.ap-now.com).
Seasoned controllers know that building any kind of operations manual is not a simple undertaking and requires time and effort to complete. The biggest single challenge is updating existing policies and procedures. I’ve seen quite a few manuals gathering dust on a bookshelf somewhere. All those policies and procedures that took so much time and work to document, print and handout are forgotten before the ink is dry. Now that we are living under a ‘cloud’ we can use our Microsoft Exchange server (sharepoint) or a web based host so that you no longer have to update only periodically to avoid constant reprints. Make your manual dynamic and timely and I believe it will provide a more enhanced set of internal controls over your accounting function.