The Need for Accounting Procedures

A business needs a set of well-designed procedures to ensure that its transactions are completed in a uniform manner. Otherwise, a company will experience inefficiencies and an increased incidence of fraud, and will spend an inordinate amount of time correcting transaction errors.

A procedure documents a business transaction. As such, it lists the specific steps required to complete a transaction, and is very useful for enforcing a high degree of uniformity in how those steps are completed. A procedure frequently incorporates one or more controls, which are designed to mitigate the risk of various types of losses. In some cases, an entire procedure is intended to be a control. Procedures may also be used to instruct new employees in how a company does business.

From the perspective of the management team, the first purpose (uniformity) is the most important, since it leads to greater efficiency. However, an auditor or risk manager may be more concerned with the second purpose (control), since they have a great interest in mitigating any number of risks to which a business is subjected. Further, the human resources staff has a great interest in the third purpose (training). Thus, there are multiple constituencies within a business that have a considerable interest in the construction and maintenance of a set of procedures.

Procedures are needed to ensure that a company is capable of completing its objectives. For example, the primary purpose of a consumer products company is to place reliable and well-constructed products in the hands of its customers. In order to sell goods to those customers, it must be able to complete the following tasks consistently, time after time:

• Log in a customer order
• Pick the goods from stock
• Assemble them into a complete order that is ready for shipment by the promised date
• Reliably issue an accurate invoice to the customer

A procedure is needed to give structure to these activities. For example, one procedure could instruct the order entry staff regarding how to record order information from a customer into a sales order (which is used to process an order within a company), which errors may arise and how to deal with them, and where to send copies of the sales order.

It is certainly possible for very experienced employees to handle these tasks without a formal procedure, because they have been with the company long enough to have learned how to deal with most situations through experience. However, such an approach relies upon the verbal transfer of information to more junior employees, which is an unreliable approach that gradually leads to the use of many variations on a single procedure.

Imagine a situation where there are no formal procedures in a company that operates multiple retail stores. Each store develops its own methods for handling business transactions. Each one will have different control problems, different forms, different levels of efficiency, and different types of errors. Someone trying to review the operations of all the stores would be overwhelmed by the cacophony of different methods.

You can see from this example that procedures are of great value in providing structure to a business – they define how a business does things.

Where do you stand on procedures?

Blog information from Steven Bragg’s Accounting Procedures course.

 

Managing CPE Compliance—a Hassle?

Do any of these complaints sound familiar?

1. I have too many requirements to keep track of.
2. It’s the 21st century for Pete’s sake—I shouldn’t have to keep paper files of certificates anymore.
3. Requirements keep changing. I’m afraid I’ll miss something.
4. I want to be more efficient. I wish it was easier to tell which courses will meet multiple requirements.
5. I have a career learning plan and I have CPE requirements. I wish they meshed better and reinforced each other
6. I’m a firm admin and have to manage the requirements of scores of professionals. A spreadsheet just doesn’t cut it.
7. I often end up scrambling for courses at the last minute. I wish I could check my status as I go.
8. I get so busy. Reminders about CPE deadlines would really help
9. Lucky me, I “won” the audit lottery. I wish I were more confident that I’ve done everything required.

These are some of the problems we hear about from professionals, like you, who take our courses. If any of above common laments sounds familiar, we invite you to check out CPE Link’s Compliance Manager. It just might be the solution you’re looking for.

What’s your biggest issue managing your CPE compliance?

 

Could There Be An Embezzler On Your Payroll?

An interview with Paul McCormack, fraud investigator and educator…

Paul McCormack, CFE, has 17 years of fraud investigation and detection experience gained in banking, real estate, manufacturing, transportation and insurance. He currently serves as Executive Vice President with Connectics Advisory Services, based in Atlanta, GA. He has also held positions with Innovar Partners, SunTrust Bank, Ernst & Young, Delta Air Lines, PricewaterhouseCoopers, and Putnam Hayes & Bartlett. Throughout his career, Paul has assisted local law enforcement agencies, FBI, DEA, and the Secret Service.

As a fraud investigator and educator, what’s the most common misconception you encounter about employee fraud?

“It won’t happen here. I trust my employees. They would never do that to me.” Ignoring fraud or thinking that it won’t happen in your company is wishful thinking. The business press is full of companies that thought exactly the same way. Many have been forced to close their doors as a direct result of employee fraud.

What is one of the worst cases of employee fraud that you’ve investigated?

I lead an investigation involving allegations of fraud regarding the actions of the CEO, CFO, General Counsel and SVP of sales at a mid-sized company. Almost all of the allegations turned out to be true. The investigation uncovered rampant fraud and abuse including expense fraud, accounts payable fraud, accounts receivable fraud, kickbacks, payroll fraud and financial statement fraud. Each of the executives had turned a blind eye to the fraud being committed by the others. The parent company was so disgusted with the results of the investigation that it closed the company and moved the operations to another state. Three executives were fired, the fourth resigned, and 50 employees lost their jobs. The company declined to notify law enforcement in order to avoid the adverse publicity.

How big is the problem of employee fraud?

The Association of Certified Fraud Examiners (ACFE) estimates that worldwide $2.9 trillion is lost to fraud each year. The median loss to a small business is $155,000. There is also incalculable damage to customer and investor trust.

What are the chances of getting the money back?

Fraud losses are rarely recovered. Fraud schemes last a median of 18 months. During that time, the fraudster is buying things, paying down debt, or sharing your money with their family and friends. They typically don’t deposit the money in the bank and watch it earn interest. Making matters worse, thinly stretched law enforcement is often unable or unwilling to help recover fraud losses. Financial crimes can be extremely complicated and time consuming to investigate. Detectives need to close cases quickly. At the federal level, the bar is even higher. A six-figure loss may be devastating for your organization, but it may barely raise the eyebrow of an FBI agent in a large city. With no connection to organized crime, drugs or terrorism, the case file may be shelved and forgotten. Civil lawsuits won’t get the money back either. Even if entirely successful, amounts recovered will be reduced by professional fees paid to attorneys, forensic accountants, etc.

What trends in fraud are you seeing?

I sometimes open my presentations with this quote from the economist John Kenneth Galbraith: “The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”

With that said, cloud computing and Internet banking have helped employees successfully steal proprietary data and funds at an alarming rate. Coupled with lack of employee oversight and you have the proverbial “recipe for disaster”.

So what can businesses do to prevent employee fraud?

First of all, they need to set the tone for honesty and integrity at the top. If executives are viewed by employees as unethical, it makes it far easier for them to justify committing fraud. Further, companies where the executives are morally bankrupt rarely view fraud prevention as a priority. As such the company normally has a very weak internal control framework in place to combat fraud.

Paul McCormack teaches the CPE Link course, The Threat Within: Combat Employee Embezzlement

 

Family Succession Planning–a Hot Topic in 2012!

As an instructor for CPE Link webcasts on family wealth succession planning, I can say without question this is a 2012 “hot topic”. The 2010 Tax Relief Act, including numerous income and estate tax provisions, is due to expire by its terms January 1, 2013. So the year 2012 is the year of Affirmative Planning Action by clients, with positive planning advice from their CPAs and other advisors.

In spite of there being many estate planners active in working with high wealth clients, it has been shown that many families hold back on succession planning. The usual statement is that the law is uncertain, so let’s wait! However, often the real reason for inaction involves the difficult family dynamics, potential for family conflicts, and absence of advisor initiatives. People and their concerns, fears and goals are the central issue in family succession planning.

The issues of Property (“you can’t take it with you”!) and what will happen on the death of the estate owner must be considered, whether or not there is any estate tax liability. Certainly, for many families, this year’s $5 million estate tax exemption will eliminate any tax liability. However, absent new legislation, the exemption drops way down to $1 million January 1, 2013! Title and property ownership issues should be considered in any succession plan. In addition, flexible provisions must be added into the plan documents to account for changed circumstances, changes in tax law and other uncertainties. Having a plan, and discussing it within the family, also is the best way to avoid expensive litigation among heirs.

The CPA often is in an excellent position as a trusted advisor to the client to provide a stimulus for succession planning. Basic issues, covered in my succession planning courses, include Estate Planning alternatives using trusts effectively, the proper uses of FLPs, LLCs and corporations for business and investment assets, Valuation and building “discount planning”, and Buy-Sell Agreements and related Deferred Compensation Agreement Planning.

With the April initial deadline for 2011 income tax returns past, now should be the time for actively proceeding to engage clients in succession planning within the family. This not only is the right thing to do for clients; but also it is an effective method of practice development for the CPA or other advisor. Go for it, and do your best for clients – they deserve it!

Guest Blogger, Owen Fiore, JD

 

How to Create a World-Class Accounting Department

The accounting department is the back office heart of a business. It takes in information from throughout the company and uses it to bring in cash from customers and pay out cash to suppliers and employees. Though it is an essential organ of a business, it tends to attract little notice from an operational perspective.

Nonetheless, there are massive differences been the efficiency and effectiveness of average accounting departments and those that operate at a world-class level. The key difference is having a lean focus on how the operation is constructed and operated.

The simplest definition of lean from the perspective of the accounting department is to maintain the function while spending as little as possible. However, the department must meet certain objectives that are time sensitive, such as preparing financial statements, paying employees, and issuing customer invoices. These tasks must be handled within certain time constraints, which introduce bottlenecks into a department that might be operating with minimal staffing.

Consequently, we need a looser definition of the lean concept when applying it to the accounting department. Thus, we propose the following mix of characteristics for lean accounting:

• Minimal resource usage. There is certainly an overall goal of being cost-effective, but this goal is subject to the following limitations.
• Maximize cash flow. The effective management of customer billings, cash receipts, credit, and collections can have a strongly positive impact on cash flows from customers, but doing so may require additional expenditures.
• Enhanced financial analysis. The department can generate very specific financial analysis that, if acted upon, can increase company profits. Doing so calls for an investment in the cost accounting area.
• Rapid reporting. A company needs feedback on its results, and this calls for a rapid-turnaround financial reporting system, which will only be effective if it is adequately supported.

In short, the controller needs to understand that the accounting department is primarily a cost center for which cost minimization is expected, but only within the goals of maximizing inbound cash flows, providing excellent financial analysis, and issuing financial reports as rapidly as possible.

This perspective on lean accounting, courtesy of Steven Bragg, CPA, a prolific writer on accounting best practices.

 

What Version of Excel Is On Your Desktop?

By guest blogger, David Ringstrom . . .

As an instructor leading dozens of Excel classes for CPE Link each year, I find that the preponderance of attendees use Excel 2007. A surprising cadre is still holding on to older versions such as Excel 2003, or even Lotus 1-2-3. At some point I’ll need to add Office 365 to my presentations, but I’ll wait until I see folks using it. Microsoft just announced price cuts of up to 20% for the service, likely in hopes of sparking demand.

As daunting as it is to lead classes that cover three different desktop versions of Excel, soon I’ll be adding a fourth version. Excel 15, likely to be dubbed Excel 2012, is currently in a technical preview, or pre-beta, phase. This allows select customers to provide feedback to Microsoft prior to the next phase, which will be a public beta this summer. A final release of the next version of Office is expected by the end of this year.

Microsoft has been particularly tight-lipped about Excel 15 and its other Office suite companions, but information is starting to leak out. Windows 8, currently in beta testing, sports a new touch-optimized Metro look that replaces icons with onscreen tiles. My observation over the years is that Microsoft tends to make major changes every other Office version, so we could be in for changes that are as initially jarring as the Ribbon interface introduced in Office 2007.

Microsoft maintains three levels of support for their products: mainstream, extended, and online self-help. During the mainstream phase, Microsoft issues service packs and provides full levels of support. In the extended phase, primarily security patches are issued, but paid support is still available. The online self-help phase allows users to use the Microsoft Knowledgebase to try to fix problems on their own. Office 2007 enters a five-year extended support phase on October 9, 2012, while extended support for Office 2003 ends April 4, 2014.

Unless you’re chomping at the bit for yet another new Excel interface, my recommendation is upgrade to Office 2010 this year so that you can stay on a supported version and let the dust settle on Microsoft’s Metro and cloud computing changes.

 

Tax Training with a Mother’s Touch

There are, according to the IRS, 350,000 people who will be initially subject to the new Registered Tax Return Preparer test requirement in the next two years. That’s a lot of test anxiety!

CPE Link is offering the perfect remedy: A convenient online exam preparation course to help these practitioners pass the test! Plus “Tax Mama” as the instructor.

Who better than Eva Rosenberg, whose online moniker is “Tax Mama,” to teach the Form 1040 and related topics covered on the RTRP exam? Her website slogan is “tax information with a mother’s touch” and that makes me feel safer already.

In addition to providing a comforting “mama” persona, Eva is a veteran tax practitioner who knows her stuff—plus she has a very entertaining style of teaching that people love. Her course evaluations are typically filled with comments such as this: “Eva is superb! Great info, especially the “real-life” examples and checklists.”

Eva will present the first live Registered Tax Return Preparer Course in two four-hour segments on May 15 and 17. Those who plan to become Registered Tax Return Preparers better start prepping for the test!

“Mama” will help you get ready

 

February, the Month of Romance and Divorce Filings!

March may be the perfect month for CPAs and tax professionals to brush up on divorce-related tax issues. So say Armand and Robbin D’Alo, a husband-and-wife team of Certified Divorce Financial Analysts and tax professionals, who along with, Eva Rosenberg, EA teach a CPE Link course on tax issues related to divorce.

That’s because February, the month of “will you be my Valentine?” is also the month of “I want a divorce.” Yes, February is the most active month for couples to start divorce proceedings. Unfortunately, most of these breakups are at least somewhat contentious: 80 percent of divorces are one-sided decisions. So get ready! (You can relax and breathe a sigh of relief in October, when divorce filings are at low ebb.)

“Attorneys usually do not properly address the tax implications when preparing divorce documents,” says Rosenberg.

Do you know the top 10 tax issues that have the most impact on divorcing couples?

 

Looking for a Faster Close?

There are several things you can do to improve the efficiency of closing the books. Here are the top two:

Correct Errors Early: Transactional errors can arise throughout the month, which means that you can run the financial statements a few days prior to month-end and spot most of them. This is a vast improvement over waiting until you are in the midst of the closing process and then finding problems. By spotting errors a few days early, the accounting staff can research and correct items at their leisure, rather than doing so in a hurry at month-end. Also, a rushed error correction at month-end may not yield a proper fix, which means that someone has to research and correct the issue a second time – which may delay closing the books.

If you use early error correction, there will still be a few days near the end of the month where errors may arise, since the accounting staff will not have reviewed financial statements that include those days. Still, there should be far fewer errors to deal with.

Reconcile Accounts Early: One of the lengthier tasks at month-end is to reconcile all of the accounts in the balance sheet that have significant ending balances, to ensure that their contents are correct. The accounting staff could start these reconciliations a few days before month-end, and then update them for any transactions that occurred during the last couple of days of the month. This is not a cure-all by any means, since many accruals are generated at month-end, and so will not appear in early versions of account reconciliations. Nonetheless, it can remove a fair amount of reconciliation labor from the core closing period.

The concept of reconciling early is especially important for the bank reconciliation. The cash account may have many adjustments each month that are caused by unrecorded bank fees, transactional errors, not-sufficient-funds check rejections, and so forth. You can reconcile the bank accounts a few days early based on the on-line account information that most banks make available to their customers over the Internet. This leaves just a day or two of final reconciliation work during the core closing period.

Additional tip: Many banks automatically generate PDF versions of monthly bank statements and post them to their web sites, where you can download them. These statements should be available within 24 hours of the end of each month; you can complete the monthly bank reconciliation with this report.

These tips courtesy of CPE Link self-study course author, Steven Bragg. Happy closing!

 

How Confident are you When Researching Tax Questions?

Where will you find one sentence that is nearly twice as long as the entire Gettysburg Address? The Internal Revenue Code, of course. The Gettysburg Address is 278 words, while one whopper of a sentence in the IRC exceeds 450 words. And this isn’t the only instance of a long and confusing sentence! The IRC, with its 4 million words, is full of mind-bending sentences about limitations that hinge on combinations of multiple variables. Think algebra!

There are, however, some secrets to breaking the Internal Revenue Code, says Annette Nellen, CPE Link instructor on tax research (and San Jose University professor). “The Internal Revenue Code is not an easy document to navigate, read and effectively use. But there are tactics that knowledgeable researchers use.” The first, says Nellen, is to understand the structure of the code, so you can narrow your search.

So say you have become intimate with the code structure and have zeroed in on the relevant sections, subsections, and paragraphs. You’ve read carefully, paying close attention to the and’s and or’s; to the less than’s, more than’s, and at least’s (and to the words in parentheses.) You’ve scoured the code for relevant definitions, and you’ve checked out cross-references looking for clarifications or conflicts.

But even after all the reading, rereading, and reading again, the IRC hasn’t yielded a clear answer to your tax question. That’s not surprising, says Annette Nellen. “The IRC is the place to start and you may find your answer there, but that’s not usually the case.”

Your next step: the Federal Tax Regulations.