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.