Recovering Lifting Fees and Credit Card Fees (#210)

In this podcast episode, we discuss how to deal with short pays on electronic transfers, as well as how to collect the credit card transaction fee from customers. Key points made are noted below.

Lifting Fees

Let’s start with the short pays on electronic transfers. More than likely, customers aren’t really paying less than the amount they’re supposed to. Instead, when you send a wire transfer, the receiving bank deducts a lifting fee from the payment. If there’s an intermediary bank involved, then that one might also charge a lifting fee. Supposedly, this fee is for processing costs. This always leaves a residual account receivable balance that has to be cleared out.

A bad option is charging the customer the fee, since it’s not their fault. It’s the bank’s fault. If you do a lot of business with your bank, approach them about having the lifting fee reduced or eliminated. Chances are, they won’t do it, but you can always ask. If there’s an implied threat that you might move your banking business elsewhere, maybe it will work.

If payments are being made with a wire transfer, there’s a good chance that it’s an international payment. If so, and you do a lot of business in certain countries, consider setting up a corporate bank account over there. Then there’re more alternatives for being paid within the country, and without the lifting fee. However, at some point you still have to shift the funds back to the home country, which may involve another lifting fee.

For most organizations, the lifting fee is so small that it’s easier to accept it as a cost of doing business, and just get on with life.

Short Payments

But what if a customer is actually short paying, and there’s no lifting fee involved? In this case, the customer needs to be trained to stop doing that, which means leaving the balance in place and sending them statements that list the overdue amount. Once these amounts are really overdue, hold the delivery of any further orders. This is extreme behavior, especially if the customer is an important one. So, you have to balance the need to break a customer’s annoying habit of short paying against the possibility of losing some sales.

Credit Card Processing Fee Reimbursement

Then we come to how to collect the credit card processing fee from customers. This is that annoying fee of about 3% that’s charged to the merchant by the credit card companies whenever a customer uses a credit card to pay for something. It’s possible to charge customers a surcharge for the credit card processing fee, but there are restrictions on it, and the practice is banned in some areas. In addition, Visa forbids all surcharges in cases where the card is not present, such as online sales. There are some ways to add a surcharge under Visa’s rules if the card is present, such as in a retail store.

How can you simply sidestep the ban on surcharges? One of the more common approaches, and which is even recommended by Visa, is to increase all of your prices by the amount of the credit card processing fee, and then offer customers a discount back to the original price if they pay in cash. The problem with this approach is that all of your prices will appear to be higher than those of your competitors, which may lead to a decline in sales.

There’s also a modified version of that last suggestion. If the company receives a decent mix of cash and credit card payments, you could increase prices for everyone, but by a reduced amount, like one percent, and then don’t offer a discount at all. The increase still covers the cost of the credit card processing fee, since fewer people are using credit cards. The reduced amount of the price increase won’t make the company’s prices look so bad in comparison to the competition’s prices.

Another option is to not accept Visa credit card payments. If you only allow Mastercard and American Express cards from customers, the rules for surcharges are much easier to follow. The problem, of course, is that lots of people use Visa.

Use of Debit Card Payments

And then there’s the option of only accepting debit card payments. This does reduce the amount of the fee, but then most people are so accustomed to only paying with credit cards that they don’t like this option.

Fee Shifting

Another alternative is to shift the cost of the credit card fee into something else that’s still charged to the customer. For example, increase the shipping charge, or add a fee for faster delivery. Another possibility is to raise prices on those goods or services that don’t have a lot of direct competition, so that customers can’t compare prices. Or, raise prices for single-unit sales while still offering a good price for volume purchases.

Parting Thoughts

So in short, you can avoid the fee by restricting payments to certain types of cards, or not allowing credit card payments at all, or by being imaginative and shifting the fee into other types of prices.

What this really gets down to is strategy. If the company is competing based on low prices, it doesn’t have the option of increasing prices to cover the credit card fee. Instead, it really does need to require cash payments to completely avoid the fee. What management could do is use it as a marketing tool. That means explicitly saying that the company offers rock bottom prices, and the only way it can do that is to require payments in cash.

Related Courses

GAAP Guidebook

Revenue Management

Process Development for a Fast-Growing Company (#209)

In this podcast episode, we discuss the process development process within a fast-growing company. Key points made are noted below.

Typical Process Development

As a business grows, you have to keep expanding the number of processes, because the business is becoming more complex all the time. In addition, a process that might have worked fine at a low volume level starts to fall apart as the volume increases. So that’s two separate aspects of process development. Let’s start with adding to the number of processes, and begin with an example.

A small business starts out selling products directly to customers, so it has the basic processes – shipping, billing, payables, and inventory control. Then management decides to add a new type of customer, which is retail chains. The additional process that has to be addressed now is customer returns. This might have been such a tiny issue when there were only direct sales that no one cared about it. Now, the retailers ship back everything they can’t sell, which massively increases the number of returns – maybe by a factor of 10, or 20, or even 50. At this point, management considers product returns to be a major process, and the controller is told to clamp down on it with a system of return authorizations. That’s a real example, by the way. It almost bankrupted a company that I worked for a long time ago.

Inclusion in Strategy Discussions

So how do we find these additional processes early on, before they become problems? There’re a couple of ways. One is to include the controller or CFO in all strategy discussions. This gives you early warning of a potential new process before a business starts branching out into new areas.

Talk to the Staff

Second, talk to the staff. In that example I just gave, the people who knew about it were the receiving staff, who processing pallet loads of returns, and the billing staff, which was processing the credits. They know if there’s a problem before anyone else does, so cultivate contacts throughout the business.

Conduct a Process Review

Third, schedule a process review. Get the accounting staff together maybe once a quarter, and talk about which processes are working, which ones need some adjustment, and in particular which areas need processes.

And if you think processes are really a problem, then bring in a process consultant to keep examining systems all over the company and recommend changes. If the company is growing really fast, a consultant might be the best alternative, since the staff will be too buried with work to spend time on this.

Review for Losses

Another possibility is to dig through your cost variances to figure out why losses are occurring. For example, the engineering manager decides to start changing product configurations. When he does that, some older components in inventory are no longer being used, which means that the inventory obsolescence expense will start to go up. With some digging, you can figure out that some of the inventory is being bypassed by the new product configurations. The logical outcome of all that cost analysis is that an engineering change order system is put in place, where existing stocks are drawn down before a product change is allowed. Unfortunately, that’s an after-the-fact detective control, since the company is already losing money before you can find the problem and install a process to correct it.

Watch the Transaction Volumes

The second aspect of process development is figuring out when to change a process when it’s being buried by transaction volume. A key item is to watch the processing backlog. If you’re maintaining a reasonable staff headcount and the staff is well trained, and yet the processing backlog is still going up, then the process may need to be upgraded. And that doesn’t necessarily mean adding more staff to the existing process.

For example, you have a reasonably good, mid-range payables software package where the payables staff has to manually input each supplier invoice into the system. That may work fine, until the volume of incoming invoices suddenly triples. In this case, the choice may be to add more staff, but you could also look at installing a portal on the company website and requiring suppliers to enter their own invoices into the company’s payables system. Or, install an invoice scanning system that automates data entry.

For both solutions, you need to look at whether the underlying accounting system can incorporate the updates. If it can’t, then you need a whole new accounting system.

And that means that you need to plan ahead to figure out which specific system upgrades will be needed as your transaction volume goes up, and from there, figure out which accounting systems will support those upgrades.

Plan for the Most Appropriate Software Upgrade

What you’ll find is that most of the lower-end systems are largely self-contained, and don’t support those nifty labor-saving features. Which can put a controller or CFO in a bit of a bind. If you assume that growth will be fast, then you need to install an upper-end accounting system right away, before the department is buried with too much work to do a system conversion.

However, if the growth never materializes, then the company will be stuck with a terrifically awesome and amazingly expensive accounting system that it just doesn’t need. So here’s the essential problem: switching to a better accounting system needs to happen during a slack period when there’s time to install it - but there are no slack periods for a fast-growing company, so you have to correctly guess in advance that sales will increase, and install the system before they increase. But it’s hard to make that call when there’s not yet any evidence that sales will increase.

So what do people actually do? They still try to look as far ahead as possible and make the best guess for an early system upgrade, but by the time they get to it, sales will have already taken off, so they pretty much have to bring in a consulting firm to help them with the system conversion. The in-house staff just can’t spare the time to do a conversion correctly.

And in the worst case, there is no advance planning for a system upgrade, so it has to be done in a rush long after it was actually needed, which introduces a greater risk of failures because the new system wasn’t tested properly before it was turned on.

Related Courses

Accounting Controls Guidebook

Accounting Procedures Guidebook

Employee Onboarding (#208)

In this podcast episode, we discuss best practices for the new employee onboarding process. Key points made are noted below.

The Onboarding Concept

Onboarding is the induction and assimilation of an employee into an organization. Without the onboarding process, a new hire is more likely to make mistakes, since they don’t know how the company’s processes work, and their skill level may be lower than you think. In the accounting field, errors can be really expensive – and when they result in incorrect financial statements, the reputation of the whole department suffers.

A follow-on to the last problem is that new employees may not last very long. They make mistakes, which makes them look bad, and then either they leave, or the controller fires them because they’re “not working out.” In reality, the departure of a new employee might be the fault of the controller, because there was no onboarding process.

So what can be done? In short, a lot of hand holding. When a new hire walks in the door, there needs to be a more experienced person waiting for him. That person is matched up with the new hire on a full-time basis. Though that “full-time” statement requires some explanation.

The Rapid Feedback Approach

Consider using a rapid feedback form of onboarding. This means the trainer sits down with a new hire and walks him through a task, explaining every possible aspect of how to do it. Such as where certain files are located, who you have to talk to, which spreadsheets need to be updated, which approvals are needed, and so on. And then immediately have the person do a live transaction, while watching him like a hawk.

By taking this approach, the new hire gets a comprehensive feel for each task that he’s involved with, right from the start. In addition, the trainer watches how the new hire performs the task, and so can judge his knowledge and confidence level right away.

If the person is clearly stellar, then a few repetitions will be enough, and the trainer moves on to the next training item. If not, then the trainer goes back over the material as many times as it takes. At the end of the day, the trainer discusses the new hire with the controller. The discussion is about rate of progress, existing knowledge, and error rates. This gives management an immediate and solid understanding of the new recruit.

The next day, do it again with new tasks, but also mixing in some of the items that were learned the day before. This gives the trainer information about the retention level of the new hire.

Periodic Updates

Once the person has been trained in all possible areas, the trainer’s work is not done. Instead, the trainer lets the new hire conduct all aspects of the job, but also blocks out time with the person at the end of each day to talk about how the work went, and review actual transactions that the person dealt with, to look for errors or maybe whether the person is frustrated with how the process works, or possibly to see if there’re any interpersonal issues getting in the way.

After a few weeks of this, the trainer backs off to meeting once a week, with some spot checking of the person’s actual work product. After about three months, the new hire is considered to be reasonably well assimilated into the business.

Feedback About the New Hire

By going through this labor-intensive approach, you get new hires who are informed immediately if they do something wrong. This corrects bad habits on the spot, so they have fewer frustrations in meshing with their new jobs.

In addition, the trainer and the controller will know exactly what they have within a few days of the person starting work. Including the weak spots of a person, which can be counteracted with more training. This beats a more laid back system, where a person might start work and no one knows if he’s doing the work correctly until an error is found or someone complains – which might be weeks or even a few months later.

How to Find the Training Time

The only way to really have the necessary amount of spare training time is to have a slight level of overcapacity in the department. If there’re a few more people on hand than is absolutely necessary, it doesn’t take an overwhelming amount of schedule reshuffling to find the time. In addition, you can make it a requirement for senior staff to be involved in training for a certain part of each year, and include it in their annual reviews.

Another possibility is to figure out the busiest times in the annual work schedule of the accounting department, and only bring in new hires during other parts of the year. In fact, hiring during the busiest part of the year should be actively avoided, since new hires are almost certain to be under a lot of pressure to perform well.

The Need for Introductions

An additional concern is that the person does not interact with the rest of the department or develop contacts in other departments, except with those people he met during the initial training. Some companies like to have informal get-togethers, so that employees can mix; but the outcome is too mixed. A new hire might bond with one or two people, and that’s it. They miss out on a much broader range of contacts.

A possibility is for the senior staff to consider grabbing a new hire and having them come along for meetings with other departments, or other parts of the accounting department. The intent is to force them into meeting as many people as possible. And at the same time, they can learn about the subject of each meeting, so they gain a broader understanding of the issues that the accounting department is facing.

The controller can maintain a listing of which employees have been involved in which meetings around the company, and target anyone who’s not been involved much to participate more. That level of involvement by the controller might seem like an excessive amount of personnel administration, but it helps to remember that the controller job is a management position, and training up your staff is actually more important than the accounting aspects of the job.

Related Courses

Employee Onboarding

Recruiting for Accountants (#207)

In this podcast episode, we discuss the best recruiting methods for the hiring of accountants. Key points made are noted below.

Base Recruiting on the Desired Result

When figuring out the best recruiting method, first determine the result that you want to achieve. Which is not only a high-quality group of candidates, but also not having to wade through a thick stack of resumes. It’s that second item that drives me to be pretty specific about how to recruit. I really don’t like digging through masses of resumes when 99% of them are clearly not what I want, and then I have to do too many screening calls and interviews to arrive at a couple of good people.

Negative Recommendations

So here are some negative recommendations. Don’t post any accounting job on an on-line job search site. When you post a job on these sites, you’re simply going to get dumped on with masses of resumes. Instead, look for recruiting methods that cut out those candidates that won’t fit.

Tailored Recruiting Solutions

A single recruiting approach doesn’t work for everyone in the accounting department. If you’re looking for a senior position, like a controller or assistant controller, the recruiting is not the same as what you’d use for a lower-level position, like a payables clerk. The reason is that the quality of candidate needs to be very high for the senior positions, and there aren’t very many of those people around. At the lower levels, there’re many more qualified people, and they’re somewhat easier to find.

To fill a senior position, ask the company’s auditors. They may have someone in-house who wants to go to the private sector. In addition, they have connections with all of their other clients, and they may know of someone. The auditors value their relationship with the company, so they have a strong incentive not to send over the resume of a weak candidate.

Second, call a recruiter. The best ones have hundreds of contacts with people who may not even be looking for a job right now. They can match up my requirements with who they know, and pre-screen them, and then send over just a few resumes that are probably close to what I need. So this is an efficient recruiting method.

A few thoughts on recruiters. When the economy is hot, lots of new recruiting firms open up and try to get my business. I don’t use them, because they haven’t been around long enough to have built up a network of contacts. Instead, I use the recruiting firms that have been around the longest, and the people within those firms that have also been around the longest. And then I always stick with the same firm. That way, if they have someone really good, I hear about it first. That means giving them an exclusive on a job search.

I don’t contact the auditors for lower-level positions. They don’t have anyone on their staffs who would want to transfer into a clerical job, so there’s no point in contacting them. Instead, set up a referral bonus, so that everyone in the company is looking around through their networks for candidates. The people who are referred this way tend to be fairly good, since the person doing the referring is essentially pre-screening them. If there’s a company newsletter, post the jobs in there, and the employees will take over the job search.

Other Recruiting Options

Set up a jobs page on the company website. If someone is energetic enough to bookmark this page and then keep checking it, they may have the makings of a good employee – so this approach will winnow out those people who can’t be bothered to check the website. Also, don’t bury the jobs page deep down in the website. Make it one of the major links on the home page.

Use the same approach for social media sites. Post job openings on the company’s LinkedIn and Facebook pages, and issue notices on Twitter.

Once there is a pool of good candidates for a job, ask them where they heard about it. This tells you which recruiting methods worked, and which ones can be dropped.

Here are some recruiting options that are a bit less mainstream: First, if anyone has left the company who was really quite good, keep in touch. Contact them maybe every four months. These people may find that their new job wasn’t what they expected. If you’ve maintained contact, there’s a good chance you can get them back.

The same principle applies to candidates who interviewed for a job, but were not selected. If any of them looked promising, then enter their resume and contact information and interview notes in a database, and call them back if something comes up later. In this case, it helps to enter into the database the position that they’d be good at, rather than the one they originally applied for. So for example, someone was too inexperienced to be the controller, but would be a great payables manager. If so, make a note of it. This is better than conducting a new search from scratch, because you’ve already interviewed the person.

Maybe someone wants to retire. If so, offer them a part-time position. That way, they can gradually transition into retirement, and make some money on the side. This keeps you from having to recruit a new person, at least for a while.

If you need someone for a junior position, consider bringing in an intern. They need supervision and a lot of training. Even so, you have a chance to view their work and how they behave for a couple of months, so it’ll be pretty obvious if you should hire them.

Related Courses

Accountants’ Guidebook

CFO Guidebook

New Controller Guidebook

The CPA Certification for an Older Person (#206)

In this podcast episode, we discuss whether it makes sense to pursue a CPA certification later in life. Key points made are noted below.

The CPA Firm Promotion Track

The first issue is the promotion track in CPA firms. They want to hire younger people straight out of college and put them on a path that gets them a partner title by about the age of 35. A partner is then required to retire by around age 62 to 65, which creates new partner positions that can be allocated to those people who are on the normal promotion track.

This early start right out of college is important, because the new recruits don’t yet have any major impediments that might deflect their attention from the job. So, they have no mortgage, and probably no children. That means they can work long hours, and are more willing to move if the audit firm wants them to.

Let’s say that you are 10 years older than the normal accounting major going into an audit firm, which would be 32 years old. At this point, it would be reasonable to assume that you’re paying a mortgage, and there are kids to pay for, so going back to school full time is not a realistic option. Instead, you have to attend college at night to pick up the required accounting and auditing classes. Figure on about six years to do this. So by the time you’re 38 years old, you’re just ready to take the CPA exam and apply to jobs at audit firms.

Let’s say that you’re hired. You arrive at the audit firm at the age of 38 as a staff auditor, and you’re looking at a promotion track that will put you in the partner position about a dozen years later, at the age of 50.

So let’s explore some issues that might come up. First, at the age of 38, you’ve put down roots in the local community and the kids are in a school that they like, so it’s not overly reasonable to expect that you can move somewhere else if the company requires it.

That can block further promotions, and especially the final promotion to partner, since they may only have a partner position available in a different city.

Working Hours

The next issue is working hours. Energy levels are highest when you’re in your twenties, and go down from there. A reasonable question to ask is whether you want to go through the grind in your 40s to make partner, doing 60 to 80 hours per week. That can also put a lot of stress on your marriage.

The Dropout Rate

Another consideration is that, on average, the dropout rate in audit firms, especially among new staff, is about 20% per year. So you also need to consider the probability that you go through all of this work, and then wash out within a couple of years of starting the job.

The Pay Scale

And finally, there’s no pay boost for an audit staff person, just because you’re older. The same pay scales apply to everyone, so it’s possible that you’ll take a pay cut to become an auditor, in hopes of making back the lost wages if you become a partner. And not many people make it to the partner position. Even if you make it, the retirement age is likely to be 62 to 65, so there are far fewer years than usual for earning a significant amount of money.

Final Thoughts

If the intent is to get the CPA in order to just have it on your resume, then focus on getting in two years at an audit firm in order to qualify for the certification, and then move on to a corporate job. However, in that last case, prospective corporate employers will still look at your job title at the audit firm when figuring out how qualified you are for a management position. If you only worked two years for an audit firm and then got out, then that’s not enough for a more senior corporate management position.

In short, getting a late start on a CPA can be difficult. Job prospects are not as good, and the amount of time left in your career to earn much money is greatly reduced. This is not an easy decision to make.

Related Courses

Accountants’ Guidebook

Synthetic FOB Destination (#205)

In this podcast episode, we discuss synthetic freight on board destination shipping arrangements. Key points made are noted below.

The Freight on Board Scenario

This situation arises when a seller is selling goods using freight on board shipping point terms, which means that normally the customer takes responsibility for the goods being shipped to it once the goods leave the shipping dock of the seller. Under FOB shipping point terms, the seller recognizes revenue on the goods as soon as the goods leave its premises.

However, the seller is also promising the customer that the seller will replace any goods that are lost or damaged while the shipment is in transit to the customer. This could be standard industry practice. At any rate, it means that the seller is effectively retaining the responsibilities of ownership until the goods reach the customer. So this means there’s a timing delay before the seller can actually recognize revenue.

Revenue Recognition for Freight on Board

The way this has worked in the past is that the seller defers revenue recognition until the estimated date of delivery to the customer. It’s really not practical to verify the actual delivery date for every customer delivery, especially if it’s hard to get a proof of receipt. So instead, the seller does an annual analysis of the actual delivery data provided by its freight carriers, to figure out the average number of delivery days.

For example, if the analysis shows that it takes an average of three days for a delivery to reach a customer, then the seller assumes that all deliveries for the last three days of the month were not received by customers during that month. So, that revenue is recognized in the next month.

The easiest way to make this work is for the accounting staff to include it as a step in the month-end closing process. First, they identify all synthetic FOB destination sales, and then they create a reversing entry that shifts the associated sales and cost of goods sold into the next month. That is how the process has worked in the past.

Impact of the New Revenue Recognition Standard

But what about the new revenue recognition standard? Under this standard, the key issue is when control over the goods changes, not when there’s a transfer of the risks and rewards of ownership. So when does the customer gain control? FOB shipping point terms can give the customer title to the goods as soon as the seller ships the goods, which means that there’s an immediate change of control. Or, maybe the customer has the ability to redirect the goods to its own customers while the goods are in transit. If so, that also implies an immediate change of control.

What this means under the new revenue recognition standard is that we really have two products for which the seller can recognize revenue. One is the goods, and the other is its coverage of the risk of loss during the in-transit period. If so, you need to allocate the selling price to each of these performance obligations. The result would probably be that the bulk of the sale can be recognized at the point of shipment from the seller’s facility. A small part of the sale is linked to the seller’s coverage of the risk of loss during the in-transit period.

To figure out the size of the second part of the revenue recognition, the simplest approach would be to calculate the historical cost of replacing goods that are lost or damaged in transit, and apply this amount to the sale transaction.

What does this mean from the perspective of day-to-day accounting? Nothing at all for individual sale transactions. Just record sales as usual. Then, wait until the month-end close, and follow these steps:

• First, take note of all synthetic FOB destination transactions.

• Second, for those transactions, calculate the amount of the revenue associated with the risk of loss.

• Finally, create a reversing entry that shifts this revenue out of the current month and into the next month.

How does this vary from the method that’s historically been used? Basically, revenue for the bulk of all sales is accelerated to the point of shipment, which means that businesses using synthetic FOB destination terms will experience a one-time bump in sales and profits that’s likely to be fairly small.

Related Courses

Accounting for Freight

GAAP Guidebook

How to Handle Auditors (#204)

In this podcast episode, we discuss how to handle auditors from the perspective of the controller, and specifically, when to push back. Key points made are noted below.

Why We Party When Auditors Leave

Controllers take their entire staffs out to lunch the day after the auditors leave. It’s a celebration of not having auditors around anymore. And that’s because it’s not a happy relationship between the two parties.

The problem comes from two sources. One is that the auditors are investigating the work of the accounting staff, so the auditors’ job is to pick apart what they find and basically make nuisances of themselves. The second problem is that some auditors see themselves as being superior to the accounting people whose work they’re investigating, because of the prestige of working for a major audit firm, and because everyone else who couldn’t get an auditing job went to work in the private sector. The second point is exacerbated when the in-house accounting staff has not worked as auditors, and so doesn’t understand the audit procedures that are being used.

Auditor Retention

There are several ways to handle auditors, which are driven by the preceding two problems. First, try to keep the same auditors, year after year. When the same group keeps coming back, that means there are fewer newbie auditors who have to be trained up in how the company operates and why the accounting is done in a certain way. This also means having a word with the audit committee before they try and switch to some new audit firm, maybe to try and lower costs. Point out that having to start over with an entirely new group of auditors requires lots of extra training time by the accounting staff.

Assign Senior Staff to Auditors

Second, do the same thing with the in-house staff, which means that only the most senior accounting personnel interact with the auditors. At most, allow just one or two junior accounting staff to work with the auditors each year, so they can gradually build up their expertise in dealing with auditors.

Minimize New Practices

Third, do not blindside the auditors with new practices. If the accounting was done one way last year, keep doing it exactly the same way this year, so the auditors won’t bug you with questions about the change. And if there’s a really good reason to change accounting methods, then have a chat with the audit manager when you’re thinking about making the change. Don’t wait until the new system is in place, because then you may find that the lead auditor doesn’t like the new approach, and will force you to switch back to the old method.

Revise the Work Schedule

Fourth, after the auditors are gone, sit down with the staff and go over the items that the auditors requested, and which annoyed the staff the most. Put those items in the work schedule that has to be completed before the auditors show up the next time. That way, a point of contention is eliminated.

Attempt to Change Specific Auditors

Now, what if there’s some major friction with specific auditors? Maybe they don’t understand auditing concepts, or they don’t know how to get along with clients, or maybe they have the accounting staff running around digging up information about transactions that’s completely immaterial. The situation is even worse when they really do think they’re better than the accounting staff. In these situations, It is acceptable to haul the audit manager into your office, close the door, and engage in some polite bitching. The trouble is that the auditors actually report to the audit committee, not the controller, so it’s not possible to absolutely, positively get rid of an auditor.

Retain Competent Auditors

The reverse side of trying to get rid of auditors is to do everything possible to keep those who are clearly competent, or at least only mildly annoying. Believe me, in this relationship, a mildly annoying auditor is a prized possession. So keep requesting that the audit partner bring these people back next year.

Fight Back on Irrelevant Proposals

What about situations where the auditors propose journal entries that you think are not needed? This usually means that something is immaterial, or just moves around the balances in the balance sheet. I fight back on these proposals, usually because they come at the end of the audit, and by then I’m getting pretty punchy. However, entering a journal entry in the accounting software isn’t really very hard, so maybe it’s better to just go ahead and do it.

Summary

In short, be as prepared as possible at the start of the audit, in order to reduce friction, and give lots of warning when there’s going to be a major accounting change. Also, try to bring back the good auditors for next year, and make it quite clear which ones are not acceptable. And finally, it’s OK to be ornery – auditors deserve a little push back. It just doesn’t seem right if the annual audit doesn’t go by without at least one argument.

Related Courses

How to Conduct an Audit Engagement

New Controller Guidebook

Presenting the Financial Statements (#203)

In this podcast episode, we provide tips for the chief financial officer (CFO) on how to present monthly financial statements. Key points made are noted below.

The Need for CFO Insights

The CFO deals with financial information all day, and so has a deep understanding of what’s being reported in the financial statements. No one else on the management team has that level of knowledge. So, if the CFO just hands out the financials without any additional commentary, this is doing quite a disservice to anyone reading them. They need the insights of the CFO.

The Cover Letter Approach

At the most modest level, you could prepare a standard cover letter that tells the reader how much assets have gone up or down, and how much of the line of credit is left, and so on. But that’s just a clerical enhancement. The CFO needs to provide a more in-depth view.

The Strategy Discussion Approach

To do this, it’s necessary to understand the organization’s strategy, and then use the financials as a backdrop to show management how the strategy is progressing. This is something that only the CFO can do, because the accounting staff has no idea what’s going on with the strategy.

For example, the management team has decided to direct money towards a new product line. If they were to look at the financial statements, everything associated with that product line is merged in with the results from the rest of the company, so the CFO needs to break out this information. This could include talking about how much money has been invested in the product line, as well as the sales and profits generated by the new products. But if the CFO wants to give a really detailed view of the situation, he could point out the level of returns from customers for the new products in comparison to product returns for the company as a whole. There could be a discussion of what’s happening with the accounts receivable investment, since the new products might be sold to an entirely different group of customers that wants longer payment terms. Same goes for the investment in inventory, since it might be necessary to stock more of it to meet customer demands.

The point here is that there’s always some new initiative going on, and it’s the CFO’s job to point out the financial impact. This is important, since there’s a strong chance that the initiative will fail. The CFO is in the best position to see a failure coming, and so needs to warn management as soon as the information is available.

The same goes for an outstanding success. If it appears that some product or service is suddenly selling like crazy and generating all kinds of profit, the management team won’t see it in the financial statements unless the CFO tells them. The financial statements are so aggregated that it’s not possible to see the relevant information.

The Selected Variances Approach

Another issue is that most organizations have a steady core business that doesn’t change much over long periods of time. The product line is established and profits are consistent. The CFO needs to keep a close watch over these items, too, since a twitch in the numbers could indicate the start of a major problem. This type of analysis is harder than reviewing the results of new products, since you don’t know what might happen. This means the CFO needs to look at a large number of variances, and drill down when there seems to be a pattern worth reporting to management.

The Policy Changes Approach

And then we have reporting on policy changes. For example, a large customer might ask for longer payment terms. The president doesn’t really know what the impact is, and so he agrees. It’s the CFO’s job to report on what that did to the company, in terms of longer days of receivables. This could also happen if there’s a decision to increase the number of products that’ll be stocked, which translates into longer days of inventory.

The way policy change reporting usually works out is that working capital increases in size – which is bad, since it requires more funding. So the CFO needs to be careful not to get into an “I told you so” mode when describing what happened to the company after management made a policy change. This calls for some politeness.

The Pattern Analysis Approach

And so far, we’ve only talked about what has happened. What about what will happen? The CFO may see a pattern developing in the financial statements, so it makes sense to carry the pattern forward and see what happens. So, for example, a policy decision to increase the number of days of credit to customers can be translated into a projected increase in working capital, which in turn means that the company will have used up all of its cash in three months in order to fund accounts receivable.

The Upcoming Events Approach

Another area is presenting to management some options for running things differently from what’s happened in the past. For example, the office lease is expiring soon, and if we move to the facility down the road, we can save X amount of money per year. This type of reporting isn’t really about an interpretation of financial results. It’s more about presenting an alternative view of the financials if certain things were to change.

The Need for In-Person Investigations

It is possible to write a great cover letter that highlights the main points. But to really make an impression, the CFO has to present the key points in person. That way, it is easier to expand on them.

A good presentation takes time to formulate. It’s entirely possible that you spend as much time working on the presentation as you did developing the recommendations.

So in short, the CFO should put a lot of effort into digging out just those key pieces of information in the financials that will really make a difference, and then make a persuasive presentation.

Related Courses

CFO Guidebook

New Controller Guidebook

High-Paying Accounting Jobs (#202)

In this podcast episode, we discuss high-paying accounting jobs. Key points made are noted below.

In what positions can you make a lot of money without being on the management track? These would be non-traditional accounting and finance positions. Keep in mind that the hours can be long, and work may start on short notice.

The Preparer of Public Company Reports

A preparer of public company reports is paid very well. Many smaller public companies don’t have enough accounting staff to do the required SEC reporting. And since the reporting activity is quite specialized, they farm it out to people who have a detailed knowledge of the reporting requirements. Someone who wants to get into this line of work needs to do it for a number of years for a larger company, as the in-house reporting specialist. Be aware that the level of precision for this kind of work is incredibly high. Mistakes are not tolerated. Also, expect a brutal work schedule, since there’ll be a few weeks when you work every waking hour. After the quarterly rush is over, there’s no further work until the next reporting period comes around. This work can be done from home.

Forensic Accounting

Another option is forensic accounting. This is usually a function within a consulting or accounting firm, where the partner dredges up a legal or insurance case that requires a detailed investigation. The work can cover all kinds of areas, like securities fraud, money laundering, and reconstructing accounting records. The work is interesting, but be aware that the work load can be bad. Projects might pop up with no warning at all. These investigations could be anywhere in the world. You may need to be an expert witness in court. So if you don’t like to be grilled by an attorney, don’t get into this line of work.

Process Consulting

Another possibility is process consulting. This could mean examining an organization’s existing accounting systems and recommending changes, or it could involve being part of a team that installs software, and the accounting processes have to be reconfigured to work with the new software. These tend to be large projects that could last for months or even a couple of years. Because of the size, they’re usually handled by large consulting firms, so you’d have to work for one of them. There will be travel on these jobs, so expect to be living out of a hotel room. A nice feature is that the client actually wants to work with you, since you’re there to improve their jobs.

Controls Analysis

A variation on process consulting is controls analysis. You can do this as an independent, but it’s more commonly found as a specialization within a larger accounting firm. And as the name implies, this is an examination of the controls that a business has in place. The outcome is a report that states all of the control shortcomings found, with recommendations for how to fix them. This tends to be one of the less stressful jobs, but this is boring work.

Tax Consulting

Another option is tax consulting. This usually means working in an advisory role to assist management, not doing tax filings. This is not a junior position. It means working in tax accounting for a long time to build up the expertise, and possibly adding a law degree onto a masters in taxation. This type of position can be found in the tax practice of a Big Four accounting firm, but it’s also possible in a larger law firm. This is really specialized. For example, it could be targeted at just wealth preservation for rich clients, or for setting up captive insurance companies, or for setting transfer prices, and so on.

Mergers and Acquisitions Consulting

A final suggestion is mergers and acquisitions advisory services. This involves due diligence on acquisition targets, figuring out pro forma results for a combined entity, synergy analysis, and so forth. These services are provided by larger firms, so you’d have to work for one. This can include investment banks, law firms, and larger accounting firms. And yet again, work tends to pop up unexpectedly, and clients expect you to drop everything and work for them for as long as it takes.

Parting Thoughts

A common thread that runs through these positions is that the perceived value to the client is high. So, for example, helping a client to win a case with some quality forensic accounting could be worth millions to the client. Or, some clever tax advice could save millions, too. Same goes for mergers and acquisitions.

On the other hand, focusing on an area where the perceived value is lower means that billing rates will be lower, too. So advising on accounts receivable collections might not justify a high billing rate. Neither would doing bookkeeping as an outsourced service. And neither would preparing tax returns. There’s lots of competition in these areas, and the value is lower, so billing rates are lower. In short, pay attention to the value being created for the client.

Related Courses

Fraud Examination

Mergers and Acquisitions

Public Company Accounting and Finance

Shipment Cutoff Best Practices (#201)

In this podcast episode, we discuss best practices for shipment cutoff, when the revenue associated with a shipment is to be recognized in one reporting period versus another period. Key points made are noted below.

Revenue Recognition Rules

Anything shipped by midnight on the last day of a reporting period is considered revenue for that reporting period. Anything shipped even a few seconds later becomes part of the revenue for the next reporting period. This is a major issue, if only because the auditors will check shipment cutoff at year-end as part of their year-end auditing procedures.

The real issue is that revenue could be recognized in the wrong period, which could trigger the reporting of profits that don’t actually exist in that period. Management might even encourage sloppy shipment cutoff practices, so that they can move revenue into different periods for their own purposes. For example, if management has promised investors or lenders that profits will be a certain amount, they can guarantee it just by keeping the books open, maybe for a couple of days after the actual end of the period. This is especially likely if the management team will earn a bonus if profits reach a certain number.

The Need to Systematize the Cutoff

A key best practice is to systematize the cutoff to the point where it’ll require some real effort for anyone to force a shipment into the wrong reporting period. For example, have the computer system print all shipping labels based on the system date. This means that someone would have to go into the computer system and manually alter the date in order to record a delivery in a different reporting period, which can be difficult. The shipments and their system assigned-dates then roll straight into the accounting system, where the software uses the assigned date to decide which period they fall into.

Prenumber Shipping Documents

Another possibility is to prenumber the shipping documents, so that any shipments made using a later document number are more likely to be associated with a later reporting period. This could involve running a report that notes the shipping document numbers for the last day of the reporting period. Any numbers that are too high are investigated.

Shipping Document Collection Procedure

Have a procedure where an accounting staff person is scheduled to pick up all shipping documents from the shipping department a few minutes after the end of shipment activities on the last day of the reporting period. Any shipping documents prepared after this pickup are assumed to be part of the following period’s shipments. This final batch of documents is then stored in a locked filing cabinet in the accounting offices until they can be processed the next business day.

Close the Books Quickly

Another approach is to close the books so fast that there’s almost no room for anyone to keep adding shipments to the preceding reporting period. For example, if it becomes standard practice to close the books and issue financial statements the next day, then there might only be a window of opportunity of a couple of hours for someone to keep recording shipments in the last reporting period.

Active Oversight of the Cutoff

A possibility that could create more conflict with management is active oversight of the cutoff. For example, have someone from the accounting department show up at the shipping dock and make note of the last shipment that went out the door as of the close of business on that day, and also make a copy of the shipping log. The actual revenues for the final day are then matched against the shipping log to see if any later deliveries were subsequently added to the period’s sales. A variation is to compare the pickup dates recorded by third-party shippers to the dates listed in the shipping log.

Active oversight is a solid internal auditing activity that should be used quite a bit. But, it can make sense to gain the support of the audit committee of the board of directors in advance. Otherwise, the examination might find an exception that was instigated by management to increase reported sales – and management will squash the findings. If the audit committee is already involved, it’s harder for management to interfere.

The Need for Backbone

The controller has to have a lot of backbone in enforcing a rigid cutoff. There can’t be any exceptions. If the controller ever allows employees to backdate deliveries, this opens the door for an ongoing stream of requests to keep doing it – and that weakens the ability of the controller to impose a strict cutoff.

Related Courses

Closing the Books

The Soft Close

The Year-end Close

The Revised Lower of Cost or Market Rule (#200)

In this podcast episode, we discuss the recent change to the lower of cost or market rule. Key points made are noted below.

The Original Lower of Cost or Market Rule

The original rule came from the Accounting Research Bulletins, so it’s quite old – from the 1950s. The original rule stated that you had to record inventory at the lower of its cost or its market value, so essentially it was a write-down rule – something that businesses usually did as part of their year-end close. This write-down could happen for a lot of reasons, such as a decline in market prices, or inventory damage or obsolescence.

The trouble with the original rule was that there were a couple of ways to come up the market value part of the comparison. It could be replacement cost, or net realizable value, or net realizable value minus a normal profit margin. This meant that you needed to create a detailed spreadsheet to figure out if there might be a write-off. And, since companies usually only did it once a year, there was a lot of wasted effort every year to figure out how the calculation worked again. In short, it wasn’t overly practical.

The Revised Lower of Cost or Market Rule

The new approach streamlines the calculation, but not if an organization uses the last in, first out method or the retail inventory method. Those people are still stuck with the old, complicated approach.

The new rule is that the lower of cost or market means the lower of cost or net realizable value. Net realizable value is the estimated selling price, minus any expected costs for completing the inventory, disposing of it, and transporting it.  There’s a certain amount of guessing and estimating to come up with net realizable value, but it can be done. And if market is lower than cost, then write off the difference.

From the perspective of a student, it makes the situation more difficult to comprehend, since you still have to learn about the more complex rules for the LIFO and retail costing methods. And if a company has subsidiaries where some use LIFO and some use FIFO, then different rules will apply to each one. Another point is that the results of companies will be slightly less comparable, depending on which lower of cost or market method they use.

The reason why they decided to use these differing approaches is that several companies using the LIFO and retail methods complained that converting to the new system would be excessively costly. So, because of these arguments, which strike me as being a one-time cost, we’re permanently stuck with a situation that’s even more complex than the old system, which was too complex to begin with.

Banning the Use of LIFO

A possible solution would be to ban the use of the LIFO method, since it’s already not allowed under international standards, and then force this new lower of cost or market approach onto anyone who’s using the retail method. And then we’d finally have a more streamlined system.

Related Courses

Accounting for Inventory

Inventory Management

The Year-End Book (#199)

In this podcast episode, we discuss the year-end book, which is a summary of the results of the fiscal year and supporting information. Key points made are noted below.

Contents of the Year-End Book

The year-end book includes the year-end financial statements and trial balance, which constitute the results of the year. The supporting information starts with the general ledger, and also includes the detail for the ending asset and liability balances. This means the accounts receivable aging, accounts payable aging, the ending inventory report, and the fixed asset register. All of these supporting documents should have totals that exactly match what’s in the general ledger.

The Year-End Book as Evidence

In short, the year-end book is evidence. For example, the company may receive a buyout offer, and the buyer wants to see the financial statements for the past couple of years, plus the information that supports the financials. If so, hand over the year-end book, and that may be pretty close to all they need. Or, the owners may want to take the company public, in which case the financials for the past couple of years will need to be audited. If so, the first thing the auditors will ask for is the year-end book, which will be the starting point for their audit.

Always print the book, since electronic files could be lost.

Book Preparation Issues

Do not prepare the book until the auditors have completed their year-end work, because they may have some adjusting entries to make, which have to be recorded as journal entries for that fiscal year. Which impacts the general ledger, and the trial balance, and the financial statements. So if you already printed out everything for the book, now you have to do it again. To get around this problem, put the year-end book at the very end of the schedule for the year-end closing process.

Ensure that what you’re including in the year-end book for the current year-end matches the information stored in the preceding year-end book. There might be an extra report or two in the older book that seemed like a good piece of record keeping to have – maybe a list of operating statistics. If so, be consistent and keep right on storing the same information. It might come in handy again.

Storage of the Year-End Book

Treat the year-end books like permanent documents. So, do not dump them into an archives box and send them to the warehouse. Instead, they go into a high-quality binder that’s well-labeled, and they’re stored in the safest place you have. And when you loan them out, keep track of who has them.

The Journal Entry Binder

If the auditors are reviewing the books for a prior year, you can expect them to ask about why certain journal entries were made – and you’ll have no idea, because the entry was made so long ago. To handle this situation, there should already be a journal entry binder, which is being updated with documentation for all of the journal entries as they’re made throughout the year. At the end of the year, wait for the auditor’s adjusting entries, add them to the journal entry binder and store this binder with the year-end book. By doing so, the auditors will have a lot of high-grade information that’s easily accessible in one place.

Otherwise, you end up in an odd situation where some of the reports don’t match what’s in the general ledger, or the financial statements, or the trial balance. And you won’t discover it until a year later, when the next audit starts, and the auditors can’t figure out why their beginning balances don’t match what’s in the year-end book.

Matching to Auditor Records

A good way to make sure that the year-end book matches the auditor’s records is to ask them. Just send over your trial balance – and ask them to compare it to what they have. If there’s a problem, then fix it right away, before too much time passes, and no one remembers what happened.

Parting Thoughts

In short, give the year-end book some respect. Assemble it carefully, as the absolute last year-end task, cross-check the information in it, and then store it as carefully as possible.

Related Courses

Closing the Books

The Soft Close

The Year-End Close

Predecessor and Successor Financial Statements (#198)

In this podcast episode, we discuss the best practices for predecessor and successor financials when a company is being bought out and you have to cut off the financials in the middle of the month. Key points made are noted below.

The Cutoff Problem

The owners of the acquiree may have negotiated an earnout provision. This means the performance of the acquiree has to continue to be tracked after the acquisition, and if it does better than a target level, then the owners get a bonus payment from the acquirer. This is a problem when the cutoff is in the middle of the month, because the former owners only get credit toward their bonus for the second half of the month, and that can cause squabbling over which revenue and expense items to include or exclude. The best practice is to include in the acquisition agreement a statement that, for the purposes of the earnout, that particular month is simply the entire month. That means the official reporting month may be split, but there should be a separate pro forma income statement for that month that combines the two.

Ownership of Working Capital

The next issue is in regard to the working capital that the acquisition agreement assumes will be on the books when the acquirer takes over the business, which is in the middle of the month. The agreement may state that it’s expected to be a certain amount, which is based on an average of what the working capital has been over the past few months. If the actual amount on hand is different from the average, then the amount paid to the owners of the acquiree gets adjusted. The problem is that the amount of working capital can rise and fall during the month, and the amount in the middle of the month could be different from the amount that’s usually there at the end of the month. For example, if a company does a lot of its billings at month-end, its working capital is a lot higher then, because of the extra accounts receivable. In this case, it makes sense to look back over the past couple of months and see if the working capital level has been different during mid-month. If it has, include that figure in the acquisition agreement, so that there won’t be any final adjustment to the acquisition price paid to the owners.

Use of Journal Entries

The income statement for each part of the month has to fairly represent what happened during that part of the month. Which means that there will be a lot of journal entries. For example, there’ll need to be separate depreciation entries, one for the first part and one for the second part of the month. And whenever there’s a supplier invoice that’s intended to cover the whole month, you’ll need to use an accrual to apportion the expense between the two parts of the month.

For payroll, this is like doing a month-end payroll accrual, except that it’s in the middle of the month. This means figuring out the hours that have been worked but not paid to employees as of the mid-month financials, and creating an accrual for that amount as of the mid-month financials. And the same goes for all of the expenses that you normally accrue at month-end.

Most accruals are set up as reversing entries, so that the accounting software automatically reverses them at the beginning of the next month. But in this case the automatic reversal doesn’t work, because the second income statement for the remainder of the month is still in the same calendar month. So instead, all of these mid-month accruals have to be manually reversed within the second half of the month.

If there are any billing situations where goods and services are supplied to customers all through the month and then they’re billed at the end of the month, then you have to create an accrual for the revenue earned through the first part of the month, and then immediately reverse it in the second part of the month.

Inventory Counts

If the inventory records are unreliable, then there has to be a mid-month physical inventory count and inventory valuation.

Required Documentation

The documentation level for this mid-month close needs to be similar to what you’d do for a year-end close. That means putting together account reconciliations for the contents of all balance sheet accounts as of the mid-month close, as well as putting together what is essentially the year-end book for the mid-month financials. The reason for this level of documentation is that there’s been a change in control of the company, and the new owner will want really good beginning records.

Related Courses

Business Combinations and Consolidations

Closing the Books

Mergers and Acquisitions

How to Prevent Over-Accruals (#197)

In this podcast episode, we discuss how to close purchase orders that were not used or partially used in order to prevent over-accruals. Key points made are noted below.

Wait for Supplier Invoices to Arrive

As part of the month-end closing process, you can either wait several days for all supplier invoices to come in, or you can accrue for the expense if an invoice hasn’t arrived yet. Taking the accruals path works if you want to close the books fast, since some supplier invoices might not show up for a week.

Use Three-Way Matching

To figure out the amount of these accruals, have the purchasing department issue purchase orders for all of the expensive purchases. Then, when these orders are delivered, the payables staff matches the receiving documents against the supplier invoice and the purchase order, which is called three-way matching. At the end of the month, see if any received items don’t yet have any related supplier invoices. If they don’t, then accrue them based on the authorized price stated in the purchase order. In the better accounting systems, this is a standard report that the system generates. The report also gives good evidence of why the accrual was made, in case anyone wants to investigate an accrual.

The accrual should be based on receipts for which there is no supplier invoice. This means you need to be careful about the source document being used as the basis for the accrual.

Cancel Residual Purchase Orders

Some purchase orders stay open for months after they’re needed, or there’s a residual amount on them that a supplier can continue to ship against. It’s quite possible that a purchase order was issued because certain items were needed, but then the requirements changed, and no one ever bothered to close it. Or, most of the quantity ordered was received, and there’s still a residual amount that’s been authorized, and which the company no longer needs. A purchase order is a legal authorization to ship, so the company is obligated to pay if anyone ever takes advantage of an open purchase order and continues to ship goods to the company. This can cost some serious money.

The solution is in the purchasing department. Assuming that the purchasing systems are fairly well computerized, there should be a procedure for scanning through the list of open purchase orders in the system every day, to make sure that everything ordered is still needed. If there’re a lot of purchase orders outstanding, then each purchasing agent is responsible for reviewing his own outstanding purchase orders. And if the system is manual, then unfortunately, everyone has to scan through their open purchase order documents.

If a purchase order is closed that wasn’t completely fulfilled, then a closure document should be sent to the supplier, so there’s no longer an authorization to send more goods to the company. Also, keep a copy on file, in case a supplier still insists on sending more goods, and you want to prove your case.

In addition, consider including in the purchase order terms a statement that the purchase order is automatically voided once the designated delivery date has passed, unless specifically authorized by the company. That gives you a blanket termination with suppliers.

Review the Purchasing Manager

One additional item is to include these stray purchase orders in the annual performance review of the purchasing manager. It’s really obvious when there’s a bunch of unused or partially filled purchase orders that have been hanging around for months. At best, it’s bad recordkeeping, and at worst, it represents a liability for the company. And the purchasing manager is responsible for it.

Reporting of Residual Purchase Orders

From the perspective of the accounting department, all you have to do is include a summary of these unfilled or partially filled orders on management reports, so that everyone can see there’s a problem.

Related Courses

Closing the Books

Purchasing Guidebook

Fixed Asset Counting (#196)

In this podcast episode, we discuss the methodology for a fixed asset counting process. Key points made are noted below.

Which Fixed Assets to Count

It’s not absolutely necessary to count fixed assets. In many companies, this is a fairly informal search for just the more expensive assets.

It takes a lot of time to track down every fixed asset, which may not be a productive use of staff time. Instead, focus on just those assets that are more likely to move around. Consider flagging assets that are a combination of movable and really expensive. Then search for these items once or twice a year to verify their locations. This reduces the total fixed asset count work by around 80%.

Who Should Count Fixed Assets

You could shift the counting task over to the maintenance staff, since they can also provide information about the condition of the equipment. Or, have the IT staff count computer equipment.

When to Count Fixed Assets

Schedule the count just before the annual budgeting process, so that any fixed assets flagged for maintenance problems can be included in the capital budget for replacement.

Assign Responsibility for Fixed Assets

Have a program for replacing laptops at regular intervals, and use a policy of giving the old laptop to the employee as soon as a new one is purchased. That means the staff will take good care of their laptops, since they will be the future owners.

Assign each fixed asset to one of the department managers. When they take over a department, they formally sign for every fixed asset in their department. From that point on, they are responsible for all of these assets. If you include the results of a fixed asset review in their performance reviews, they’ll probably take good care of their assets.

Tracking of Fixed Assets

When shifting assets between departments, the department it is leaving needs to file an asset transfer form with the accounting department, which should be verified by the receiving department.

Up-to-the-minute tracking can be accomplished with active or passive radio frequency identification tags. An active tags sends out a ping that is picked up by a tracking system. This is an expensive approach, but can be useful for assets that are used in multiple locations.

Fixed asset counts are a detective control, so they will not prevent assets from being stolen.

Related Courses

Fixed Asset Accounting

Fixed Asset Controls

How to Audit Fixed Assets

Continuing Education (#195)

In this podcast episode, we discuss how to pick continuing professional education courses, and the types of books that practicing accountants should read. Key points made are noted below.

The Accounting Refresher Course

For a refresher on accounting basics, try a college textbook on basic accounting, working through the questions at the end of each chapter. Textbooks are very expensive, so buy one that is one or two editions out-of-date. These older versions are fine for introductory-level accounting, since the accounting at this level does not change much. This may not work for intermediate or advanced-level textbooks, which contain more cutting-edge topics that tend to change more frequently.

Continuing Professional Education Tips

If you are a practicing accountant and just want updates on the most recent accounting changes, take a continuing professional education (CPE) course on the specific topic you need. Before doing so, check with the course provider regarding when it was last updated.

A really large CPE course likely covers many topics at an average level of detail, while a short course covers a small topic in more detail.

Stay away from the low-priced CPE websites, which do a poor job of formatting the courses they are sent by their authors. The more expensive providers do a much better job of editing and formatting the courses.

Look for CPE distributors that curate what they offer. This means that they regularly drop courses that contain older information, and replace them with fresh material. Lesser websites are more likely to offer many courses that approximately cover the same subject.

Accounting Book Tips

The publishers of accounting books may keep them in circulation for a decade or more, so the books can be seriously out-of-date. This means checking the publication date before you buy a book. Even then, the author of a new edition may not have revised information that has gone out-of-date.

Generally look for practical accounting information, rather than theoretical, until you have mastered your job. This means starting at the general level and then working down through more specific topics in greater detail (that is perhaps more industry-specific).

Industry-specific books are easier to find for a large industry, where there are many people working there. This is not the case for a smaller industry, where the potential audience is much smaller.

Related Courses

Accountants’ Guidebook

CFO Guidebook

New Controller Guidebook

The CFO Career Path (#194)

In this podcast episode, we discuss the career path for a chief financial officer. Key points made are noted below.

Key Requirements of the Job

Being a CFO involves managing accounting, treasury, risk management, strategic planning, and investor relations, but does not require an in-depth knowledge of accounting.

Being a CFO involves a lot of face time, dealing with other managers, direct reports, bankers, investors, and the company president. It also requires long hours, so you may not want this position.

Probability of Attaining the CFO Position

Very few people make it to the CFO position, and even fewer like the job once they’ve made it there. Consequently, you might want to stop in a lower-level position that feels more comfortable.

Educational and Experience Requirements

When in school, arrange for a minor in finance, or a double major in accounting and finance.

After college, one option is to switch out of accounting and go into investment banking. Doing so increases your fund raising experience, which is a major qualification for the CFO job.

Another option is to go into auditing, pile up relevant experience, and jump from there into the CFO job. In particular, do audits for public companies, to learn about public company filings - which is very useful for a CFO. Also, try to avoid niche areas, like nonprofit clients or pension accounting, since they do not help your qualifications for the CFO job.

The other remaining option is to work your way up from within the company, which means starting in either accounting or finance. This is a bit easier from the treasury side, since the main qualification for a CFO is raising money. Consider volunteering for treasury jobs if you are working in the accounting department. Another option is to get a master’s degree in finance at night, while working during the day.

Do not transfer into the investor relations department, since it is too specialized. The only viable option is a short-term assignment into the department to gain experience, and then rotate back out.

Work for a smaller company, and especially a startup. They have very few accounting and finance people on staff, so there is less competition for the CFO job. Also, you can volunteer for all kinds of work to gain experience, like insurance, and loan packages, and budgeting.

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Spreadsheet Errors (#193)

In this podcast episode, we discuss how to deal with spreadsheet errors. Key points made are noted below.

The Nature of Spreadsheet Errors

You rely on a spreadsheet for a long time without really figuring out how it works, and then one day you realize that there’s a flaw, and it’s been churning out incorrect numbers all along. This is a wee bit of a problem if you’ve been using those numbers for journal entries, since that means the financials are wrong, too.

The worst case I ever saw was a small company that had been using an incorrect spreadsheet to figure out how much overhead to allocate to their inventory. When the auditors came in at year end, they threw out almost all of the inventory asset, which wiped out the company’s net worth. So there you go. This sort of thing can be critical.

So why do we create complicated spreadsheets? Some of the time, it’s because the accountant who created them was incredibly detail-oriented, and so he just kept on expanding and expanding it, and next thing you know, it’s a full-time job to maintain a spreadsheet. The person might even take pride in having created one of the seven spreadsheet wonders of the modern world. Unfortunately, that’s a pretty common personality trait in the accounting profession. It’s just the way we are.

Justifications for Complex Spreadsheets

I can think of only one situation where a really complex spreadsheet might be justified, which is if it contributes toward billing a customer for more money. For example, there might be a cost reimbursement contract, so the more cost you can allocate to a certain customer’s job, the better. And that might require some complexity. I once ran across someone whose entire job was using massive spreadsheets to allocate the overhead costs from an airline reservation system, so that the company could bill the supporting airlines as much as possible for it. OK, I can go with that as a justification, but I certainly wouldn’t want to have that job.

So let’s just say that there are a few good reasons for spreadsheet complexity, and a whole lot of reasons to have simpler systems. Let’s go with option number two, and see what we can do with it.

Spreadsheet Best Practices

Now, the worst case of spreadsheet errors is probably going to occur when a different person takes over a spreadsheet. This would be a good time to force the new person to dig right through the spreadsheet, figure out how it works, and then present it to someone who’s more experienced. Until they can defend the spreadsheet, they’re considered to be temporary in that job, because they don’t know how it works yet.

You could go a step further, and force them to write up the essentials of the spreadsheet in a document. That document can then go into the department’s procedures manual, which would be great if the auditors ever need information about spreadsheets.

The problem with that advice is that someone only reviews a spreadsheet at long intervals – when there’s a job change. To compress the review process a bit more, put a spreadsheet review on the department schedule at pretty long intervals – maybe once every year or two, and do it during a slow part of the year, so it won’t be skipped.

When scheduling these reviews on the calendar, pay particular attention to any spreadsheets that directly impact the financial statements. In other words, if a spreadsheet has the potential to really screw up the company’s numbers, review it before the end of the year, so that no spreadsheet errors end up in the year-end financial statements.

Another option is to require a complete spreadsheet review whenever you want to make a formula change to a spreadsheet. That means documenting what you want to change, and having someone else inspect the alteration to see if it does what you want it to do. This is quite a bit like a software coding project, where there’s a team review to go over code – except in this case, it’s a spreadsheet.

And another thing. When you want to change an existing spreadsheet, copy the old version to a separate worksheet, and then make adjustments. That way, if the new spreadsheet doesn’t work, you still have the original to fall back on.

When doing any of these reviews, take a hard look at the inputs to the spreadsheets. There’s a good chance that the report the information came from has changed over time, because no one told the person who wrote the report that it was being used as input to a spreadsheet. So if the report changes, that screws up the spreadsheet. And by the way, that also means adding information about spreadsheet inputs to that write-up of the spreadsheet that I mentioned earlier, that goes in the procedures file.

Now, these detailed reviews are way too extensive if you apply them to every possible spreadsheet, since every accountant on the planet has a few dozen of them, if not a few hundred. The point is to conduct a deep investigation on just the really massive or complicated ones. If a spreadsheet is only a simple list, then don’t bother with it.

I’d also like to make a case for the complete avoidance of complicated spreadsheets. When you dig into most types of accounting, there isn’t that much of a need for these types of spreadsheets. For example, keep cost allocations simple, because – why not? Does a slight refinement of an allocation really result in any actionable information? Probably not.

So. When all of these types of reviews I mentioned are going on, part of the dialog should be whether a spreadsheet is needed at all, or at least whether it can be simplified. Accountants being accountants, we all love complexity – but this is one case where I’m not sure we should.

My final word on the matter is that spreadsheet errors aren’t usually considered to be critical – until just after you realize that they’ve been feeding you incorrect results. So the usual approach to spreadsheets is to ignore them, and then have a crisis review, but of only the spreadsheet that was screwed up, and then everything returns to normal – until the next spreadsheet explosion. If that’s the way you want to manage it, just be aware of the downside.

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Cycle Counting (#192)

In this podcast episode, we discuss how to install and use a cycle counting system. Key points made are noted below.

Interim inventory observations are just a physical count of the inventory that happens at any time other than the end of the year. You do an interim count when the inventory record keeping system isn’t giving you accurate results. That could mean there’s a perpetual inventory system in place that really stinks, or there’s a periodic inventory system, and that’s not designed to have accurate inventory records in the first place.

What to Do With Inaccurate Inventory Records

So basically the issue is that the inventory records are inaccurate, and what to do about it. There’re three options. You could guess at the ending inventory balance, which would be based on an extrapolation of the historical ending inventory figures for the past few months. This is generally a really bad idea, because it doesn’t account for all kinds of inventory write-offs that might have occurred, like obsolescence, or theft, or excessive scrap. So estimates of inventory tend to be too high, which means that the reported profit figure is too high.

Your next choice is to conduct a physical inventory count. If you’re going to do this, make them as infrequent as possible, for a couple of reasons. First, you have to shut down the warehouse to do the count. Second, the count involves staff time, and possibly on a weekend, so there’s also the cost of overtime. And third, the result isn’t necessarily all that accurate. The reason is that the people doing the count may not work in the warehouse, so they don’t correctly identify the inventory, or they miscount it.

Even so, there may be no choice, if you don’t want to take the risk of guessing at the ending inventory balance, and there’s no cycle counting system in place yet.

Which brings us to the third option, which is cycle counting.

The Nature of Cycle Counting

In short, cycle counting involves having the warehouse staff do a count of just a few inventory items every day. If they find a mistake, they correct it in the inventory records, so that the records match what they physically see. And on top of that, any error triggers a discussion about why there was an error, so there’s an ongoing investigation into the causes of record errors.

Over time, the number of underlying reasons for record errors goes down, which means that the accuracy of the inventory records goes up. To the point where there’s really no need to do a physical count at all. So that’s the brief view of cycle counting. I’ve installed the system in several companies, so I’ll add some additional thoughts about it.

The most important issue is that the basic record keeping system has to be a perpetual system, which is the one where the inventory records are constantly being updated for incoming and outgoing inventory items. And, the records have to be updated really fast. There can’t be a backlog of transactions that haven’t been added to the inventory records yet.

Otherwise, you get a situation where a cycle counter finds an error, and corrects the database to match what he found, and then the warehouse clerk records a transaction in the system that should have been recorded the day before, and now the inventory records are wrong. So to get around this problem, I suggest giving portable terminals to the warehouse staff, so they can update the records as they move inventory.

The next issue is how to select items for a cycle count. There’re a lot of ways to do it, like counting more valuable items more frequently, or counting items that are scheduled to be needed in production, so you can spot shortages in advance. My approach is the simplest of all, which is basically to start in the lower left hand corner of the aisle furthest to the left, and end at the upper right hand corner of the aisle furthest to the right. And that’s because it’s the simplest. The warehouse staff can do this themselves. Just put a piece of red tape at the spot where they stopped counting the day before, and count another small piece of real estate the next day, and move the red tape forward a bit to mark the new ending spot.

This approach is not fancy, but it’s not subject to much error – unless you lose the piece of red tape.

And actually, I’ve modified the basic system, so that we keep high-turnover items in one aisle, and have the best cycle counter count that aisle over and over again. That keeps any shortages from developing.

How to Do a Cycle Count

Now, how to do a cycle count. Figure out which block of real estate to count, and run a report from the inventory system that lists all of the items in that block. Then take the report over to the cycle counting area, and match everything on the report to what you see on the shelf. That covers half the work. Then you trace everything on the shelf to what you see on the report. The second step is needed to see if anything has been moved into a bin but not recorded in the inventory database – which is really common.

The next issue is figuring out when to do cycle counts. And the answer is, at the beginning of each shift. Once the flood of work hits the warehouse later in the day, it’s a real struggle for the warehouse staff to do cycle counts, so don’t put the pressure on them. Just get it done in the first few minutes of the day.

Another point is to assign the warehouse staff to specific count areas, so when you find an error later on, there’s no question about who’s responsible for it. That way, you can get a competition going among the warehouse staff, which gets pretty intense if you start handing out cash bonuses each week for who has the most accurate area.

The next thing to do is a weekly accuracy audit of the warehouse. This means comparing the inventory records at random to the physical inventory, and then posting the accuracy scores in the warehouse. This really matters to the warehouse staff, especially if they’re being paid bonuses, which I totally recommend.

In terms of progress, it’s pretty slow. The initial accuracy level might only be 10 or 20 percent, and it’s a long ways from there to 100% - which you might never reach. I usually declare victory in the upper 90% range, which could be anywhere from three months to a year down the road.

The Effects of a Cycle Counting System

But the nice part when you get there is that there’s absolutely no need for a physical count. If you were to do a physical count at that point, the accuracy level of the records would actually decline, because of the errors that creep into a physical count.

When the system is really working well, we’ve just printed out an inventory report and handed it to the auditors at the end of the year, and told them to go check our numbers. There was no physical count at all. The funny part was that the warehouse staff knew the records were perfect, so they trailed along behind the auditors – just to gloat when they couldn’t find anything wrong.

So, in short, the ultimate solution is definitely cycle counting, but it might take a while to get there. In the meantime, guessing at the ending inventory balance can be a career-limiting move, so it’ll probably be necessary to do some physical counts. The pain of doing those counts might provide a little extra boost to get going on a cycle counting program.

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The Elimination of Extraordinary Items (#191)

In this podcast episode, we discuss the new accounting standard that eliminates the separate reporting of extraordinary items in the income statement. Key points made are noted below.

The Prior Treatment of Extraordinary Items

The rule used to be that you had to separately identify an extraordinary item in the income statement, net of tax, after income from continuing operations. It was intended to strip away all extraneous items from the core operating results of a business, to see how well it was really doing. An extraordinary item was something both unusual and infrequent, and typically involved a large loss.

The Elimination of Reporting for Extraordinary Items

By eliminating this reporting requirement, we are showing a more comprehensive picture of outlier transactions that still impact a business. Realistically, we should be putting more items into the body of the income statement, to show the full range of financial results. This means adding back the results of discontinued operations, and putting fewer items in other comprehensive income.

This change in the accounting standards does not apply to IFRS, since the IASB never adopted the separate reporting of extraordinary items in the first place.

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