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’!.