Must all segments of your business operate effectively for your business to be truly successful? Some businesses survive in spite of poor performance in some segment(s) that are being carried by the performance of another segment. In other words, when one segment is not productive, other segments must be even more productive to compensate for it.

While this condition certainly exists in many businesses, it is far from ideal. When all segments in your business are not functioning, well, it leaves your business vulnerable. When sales fall or production quality drops, can your business survive if it does not have a solid structure with sound best practices?

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According to the Institute of Internal Auditors (IIA), an effective system of internal controls helps ensure that our organizational processes are functioning properly, that our financial information is reliable, and that we’re in compliance with applicable regulations. Businesses primarily implement internal controls systems to protect themselves from internal fraud and abuse, while many do so with regulatory or standards compliance in mind.

It is interesting to note that, in many cases, the internal control system at many companies consists of volumes of instruction-like procedures that document activities. If a company is taking the time and effort to develop a procedure-based financial control system, it’s worth the additional effort it takes to:

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In a recent article, we briefly discussed external financial reports in terms of the audience, or specific users of company information. Generally, one of the most important users in the USA is the Internal Revenue Service (IRS), followed by various state and local taxing authorities. Required income tax returns can be prepared more easily from financial reports that are classified in a comparable manner. A tax practitioner is usually retained to prepare and file these returns. The reports most commonly requested of the company are the general ledger and related financial statements.

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Accounting Basics

Three important terms are easily confused.  They are: Bookkeeping, Accounting, and Reporting. What are they, how do they interrelate, and how do they interface with accounting policies and procedures?  First, let’s define the terms.

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Accounting methods and accounting standards are typically defined within your accounting manual, a key component of your accounting system.  Your accounting manual defines your policies, procedures, and internal controls for Sarbanes Oxley and other compliance needs.  There are two main accounting methods: accrual and cash.

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The financial transactions of any accounting system can be grouped into four major accounting cycles: Revenue, Purchase, Payroll, and General Journal.

Four Main Accounting Cycles

Accounting transactions in the form of sales invoices, receipts, purchase invoices, checks, and payroll entries are posted to the appropriate journals. Simultaneously — as a form of internal control — these postings are recorded in the general ledger, or “GL”. The GL accumulates all transaction activity, where it is organized by account class.

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How familiar are you with the accounting rules and concepts utilized by accounting software systems?  If you were more confident with the information generated by your accounting program, would it help you to use it more effectively to run your company?  More importantly, do you understand how your Accounting Policies and Procedures integrate with the accounting rules and concepts to produce the internal controls you need?

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You’ve just been given the task of writing a new procedure that documents an existing business process.  You make sure you understand, and you close with, “I’ll get on this process right away.”

That’s when your boss says, “Process? Did I say ‘process’? I meant processezzz! Plural!”  And before you can blurt out, “What do you mean?”, the boss says you need to develop procedures for all accounting processes, not just the one.  Oh, and he wants them by the end of the month!

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Writing procedures is an exercise in controlling the cost of compliance.  You’re trying to comply with customer expectations, management objectives, government regulations, and/or industry standards, making compliance expensive.  Regardless of the reason for compliance, wouldn’t you want to write as few procedures as possible if you could still conform to the compliance mandate and keep your compliance costs to a minimum?

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Small public companies like yours may finally have to begin providing the Securities and Exchange Commission (SEC) with certified assessments of their internal controls.  Smaller micro caps will be required to comply with SOX 404(b) reporting requirements beginning June 15, 2010; they’ll have to attest to the effectiveness of their internal controls in their annual reports released on or after June 15 of next year.  So, for those whose annual reports are just seven months away, the time to consider is over — it’s time to take action!

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