WHEN YOUR BALANCE SHEET’S OUT OF BALANCE and other small horrors!

 

I can’t think of anything more embarrassing then sending your Financial Statements to your lender and having some junior accountant point out that your balance sheet is out of balance.  Once a reviewer sees that, it throws the entire set of Financials and accompanying schedules, if any, into question.

As one of three CPA’s reviewing our company’s financials, the first thing we did was to check that the Balance Sheet was not out of balance and that the Net Income on the Balance Sheet matched to the Net Income on the Income Statement.  These are very simple steps that can help you discover any anomalies you might have in your financial reporting system.  My advice to you is to never let your financials go to your lender without having gone through the above recommended steps.

In most cases, faced with these problems, we contacted our software vendor for them to see if there had been an underlying programming issue.  You should be especially vigilant in this area after a recent upgrade.  Version upgrades can play havoc with your reporting system and you can be easily caught off guard.

Here are some other areas you should verify:

  • Does A/R on your balance sheet reconcile to your A/R Aging Report
  • Does A/P on your balance sheet reconcile to your A/P Aging Report
  • Do your Inventory Accounts on your Balance Sheet balance to your Inventory Detail Reports
  • Do your Fixed Assets on your  balance sheet reconcile to your Fixed Asset Reports

The above four recommendations should be standard checks and balances performed each month immediately after closing.

I know many companies go through extensive reviews of their monthly Financial Statements.  If you work for a smaller privately held company, you should be doing the same.  Here are some other steps I highly recommend:

  • Review your Cost of Goods Sold on your Income Statement and make sure it looks reasonable.  If you are able to produce a Sales Report that reflects the Total Sales, Total Cost & Total Profit by Line Item, compare the ‘Total Cost’ on the report to your Total COGS on your Income Statement.  Any differences probably represent Manual Journal Entries to the COGS account(s).   Additionally, some could be Inventory Adjustments.  They all need to be investigated.
  • I always review the Bad Debt Allowance and make sure it represents the correct amount.  For instance, if you accrue 1% per month for your Bad Debt allowance, that should be easy enough to test.
  • If you are applying an Administrative Charge, say 2% per month, check the calculation just as you would the Bad Debt Expense.

The more you can test on the Financial Statements before they are presented to management, owners or lenders, the better off you as the Controller will be.

Have any of us not regretted missing something that came back to haunt us.  Unless you just started yesterday, I’m guessing the answer to that question is a big ‘yes’!.

 

 

 

WHY MANUAL JOURNAL ENTRIES ARE NOT ALWAYS YOUR FRIEND!

So you are at Month End closing and the Cost of Goods Sold seems really distorted.  As a result, your Gross Margins are badly understated versus budget and prior year.  You go to research and find that someone on the Accounting Staff has made an entry debiting COGS and crediting an inventory account on the balance sheet.  Your system will give you the name of the person making the entry based on his login credentials.  You have a conversation with the accountant and he has no recollection of why he made it, and there is no documentation.  Anybody in a manufacturing environment has probably been through this scenario at least once or twice.  I know I have.  Manual entries to Cost of Goods Sold can wreak havoc as they can in other areas like Prepaid Asset accounts, etc.

I recently ran into a problem like this with a client.  The Staff Accountant responsible for moving certain things off the balance sheet into COGS (this had to do with Work in Process) was constantly making Journal Entries….and then turning right around and reversing them.  You could see a pattern occuring in the G/L Account Detail.  And why was this happening……………..because the accounting department could never get in agreement with the Controller about how much the month end entry should be.  Sometimes the entry was backwards, or sometimes the entry was to the incorrect entity.

I wanted to scream STOP!  But first, Full Disclosure.  I used to be guilty of this.  Just opening up the G/L JE screen and keying in a JE I hoped would fixed the problem.  Then reversing it and finally, taking myself down the black hole of JE confusion.  At that point, I would have to print out the detail and try to work myself back to ‘zero’ impact.

What is wrong with this picture?  As Controller, you need to stop the wave of manual JE’s entered by your staff and make sure that there is documentation for it.  If you set up twelve recurring monthly entries for depreciation, there should be a document in the file supporting your depreciation calculations.  If there needs to be a correction to COGS, then there has to be written documentation supporting it.

At my former company, they had a great, low tech method (eventually we took it all to PDF’s) that anyone starting out can use.  We labeled a file Jacket ‘Journal Entries’.  All Journal Entries were documented on a JE work sheet similar to ledger paper.  Behind that worksheet was supporting documentation.  Sometimes just an explanation written below the debit/credit would suffice.  For instance, ‘accrue January telephone expense’.  At the end of the month, we would remove the JE documentation from the file jacket and place it with our Month End closing workpapers.  The jacket was then empty and ready for the next monthly accounting period.

If you are working in an organization that pays close attention to the monthly Financial Statements ( and of course, they should be) start controlling the manual JE’s.  It’s good for you the Controller and it’s a great tool for your Accounting Staff who will learn that the General Ledger is not a playground for JE’s.  And no Journal Entry should be made unless it has been researched and approved.  This is not a small thing.  Taking your financials from materially accurate to materially not accurate needs to be prevented at all costs.

 

THE FALLOUT FROM WHEN AN EMPLOYEE STEALS

 

fallout

 

Many of us have been through the discovery of an employee who steals.  Sometimes, it is really difficult because it is someone we know and work with.  If you read the latest version of  The Global Report on Fraud you will discover that few businesses have escaped this problem.  Why is employee theft so rampant?  Many studies have estimated that one in four employees steal on some level from their employers.

I’ve devoted other columns to prevention techniques, strengthening of Internal Controls and especially segregation of duties.  However, today I want to discuss the ‘aftermath’.  When confronted with the facts, what are you going to do with a key employee, for instance, your only staff payroll person?  What about the Accounts Payable person falsifying invoices and presenting them to the company for payment (to her).  And, she’s your only A/P person and has become much more knowledgeable about the system and its inner workings than you are.

So here is a little quiz for you…………………pick the right answer for your company:

  1. Move them out of their department and away from tasks that involve cash.
  2. Leave them in the department but demote them and hire someone to take their place.  They can train the new hire.
  3. Put them on probation for sixty days and monitor them very closely.
  4. Fire them immediately

Which answer did you pick?  1…..2…..3…..4….?

If you picked any number other than ‘4’……………..my question to you as a Management Consultant is:  ‘ARE YOU CRAZY?’

First, if you think that the other employees in your company are not watching every move you make, you are most likely mistaken.  News that an employee has been caught stealing can travel like wildfire even if you have tried to keep everything about it secret.

Second, anything other than firing the employee will be a signal to a lot of people that they can rationalize some very bad behavior.

Third, allowing the employee to remain in any capacity is like poisoning the well from which you drink the water.  I strongly advise against it.

Several years ago, a long time dedicated employee and single mother of three was caught taking a check, endorsing it and depositing it to her account which was discovered during a reconciliation process.  Her boss felt terribly sorry for her because he knew she was in rough financial shape.  You can agree not to prosecute.  You can agree to not challenge unemployment and you can even pay some severance (I advise against that) to help the employee while she finds another job.

However, before you write a glowing letter of recommendation or tell a caller checking her references that you regret she resigned and she was a great employee, please CONSULT YOUR ATTORNEY.

Finally, remember one thing, your leadership and management skills are on the line here.  Show decisiveness in dealing with incidences of fraud.  You will be respected for it.

 

 

 

 

WHEN A CONTROLLER LOSES HER JOB

 

The story is true.  Some of the facts have been changed to protect identities.

A Controller friend of mine, I’ll call her ‘Janice’  had landed a good job about eighteen months ago.  She was hired to work for a sizable family owned operation that decided they needed to have on site accounting expertise.  However, six months in, the family sold their operation to a very large corporate entity.  The larger company wanted to continue to run the company as a separate entity with very little visible change.  At the same time, the new owners wanted to implement a more sophisticated software system.  In addition, they wanted to collect much more data about the operation than the previous operators had or were even interested in.  At the time she went to work, she was approaching her sixtieth birthday.  But retirement was not on her horizon at all.  She enjoyed working and finances were an issue too.

The first problem to arise was that the new owners had very high expectations for the controller.  The management group was young and energetic.  They worked long hours.  Many of them were Ivy League college graduates with extensive training in data analytics and financial analysis.  The difference between the Controller and top management, including their CFO was striking and apparent to all.  Over time the financial statements became less reliable while management demanded explanations for every general ledger account.  And, over time the relationship between the Controller and management deteriorated until finally one day it all came to a sad end and the controller ‘Janice’ lost her job.

Part of the problem was that the Controller, up to taking the new job, had never worked on the management side of the business.  She had always specialized in tax at a public accounting firm.  She had plodded away there year after year, enduring the long hours of tax season.  She was ready to ‘break out’ and move into an accounting manager position.

The family business was thrilled to hire her believing that since she had spent her life in a public accounting firm (in fact the firm preparing tax returns for the business) she would be more than competent to step into the controller position.

If you look at the fact pattern one might draw the conclusion that our controller was just in the wrong place at the wrong time.  As controllers, we need to understand that our working environment is ‘subject to change without notice’.   Sometimes going to work for a small company can turn into working for a very large company.  Generally, the larger the company, the higher the level of professionalism that is required.  What happened to Janice is not necessarily a predictable outcome.  Perhaps if her employer had not been acquired, she would have had the time she needed to get up to speed.  And then, maybe not.

So, what is the point of all this?  I doubt that Janice could have done anything to have prevented the inevitable outcome other than never having changed jobs.  But we all are entitled to take chances, to get out there and see what else we can do.  However, I must return to the theme of some of my earlier postings.  Never stop learning.  Spend part of every day honing your skills whether it’s getting better at Excel or reading a current article in your field.  And, if you are looking ahead thinking that things will always be the same………….I don’t this that has happened since 1990!

 

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