THE EVERYDAY CONTROLLER

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.