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?

How Important Are Financial Policies and Procedures In Your Business?

Public companies pay a lot of attention to financial results because they are required to — by the SEC, shareholders, their Board of Directors, and hopefully by management too. Yet, many small and medium sized businesses often times fail to pay attention to their overall financial processes and structures. Maybe it’s because the same oversight and shareholder pressure just isn’t there.

If you run a business, you know that cash flow is the lifeblood of your business. So you would think that having a balanced approach to financial policies and procedures would be more common than it is. Yet, operational concerns get more attention when it comes to writing policy and procedure manuals. The goal should be to strike some kind of balance between paying attention to financial matters and the other aspects of your business such as operations.

In their important work The Balanced Scorecard, Kaplan and Norton discuss four business segments that require focus in some balanced way. (Note: The idea of balance should not be taken too literally – it is not about having perfect balance in all areas of business. Some areas may take priority. The point is that to be successful a business needs to pay attention to, and work to improve in, all key business areas.)

The four segments presented for a balanced scorecard include:

• The Customer
• Learning & Growth
• Internal Processes
• Financial Measures

This should be viewed as a minimal list; your organization might identify other areas that require attention in a balanced way. Success in financial areas alone cannot translate into overall success if the business does not have good products that are delivered in a timely way that satisfies customers. While financial operations are important, they should not be the exclusive focus of management, no matter how large or small the business.

Financial Policies and Procedures Balance

That Finance is listed as one of the pillars needed for business success in the Balanced Scorecard does indicate its importance in the overarching view of what in required for businesses to be successful. Surprisingly, however, studies show a large number of medium and small businesses do not proactively manage financial processes such as developing financial strategy or conducting financial analysis. If you are one of these business owners, you need to take a look at building a financial policies and procedures manual. Producing your own finance manual will help you incorporate best practices and a systematic approach to finance, cash flow, and even raising capital when you need it.

That is why Bizmanualz has written a financial policies and procedures manual to assist you with balancing the key aspects of your financial operations including: regulatory compliance, improving performance (through well-defined processes) and implementing best practices into operational areas like Raising Capital and Treasury Management. The finance manual describes, in procedure form, best practice activities needed to manage financial processes to achieve regulatory compliance and improve financial performance.

Each financial procedure is guided by a stated finance policy, and an accompanying purpose of the procedure. Each procedure also comes with financial forms that are typically used to collect information and data as part of executing the procedure. The policies, procedures, and associated forms can be easily edited in Microsoft Word allowing you to customize all procedures and forms to meet your individual organization’s needs, or use them as finance templates to create additional company procedures important to your financial operations. Download Free Financial Policies and Procedures Samples to see for yourself how easy it can be to develop your own policy and procedure manual.

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:

• Understand major financial processes;
• Establish key finance polices and goals (including performance goals and accurate financial statements);
• Determine which processes introduce the greatest amount of risk and which are material to our financial goals;
• Prioritize development of the internal control system according to materiality, risk, and other important criteria;
• Incorporate best practices; and
• Foster an environment in which continual improvement is the status quo.

Is there a better indicator of an effective system of controls than clear goals and key performance metrics that are consistently measured and regularly improving? And are you taking advantage of the financial control system to improve process results and your financial performance?

Easily Editable Procedure Templates for Internal Control


CFO Accounting Procedures Series

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Accounting Procedures Manual

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Financial Procedures Manual

Improving Processes in the Production Area and the Office

Discussions of process improvement and quality commonly reference the production area, or shop floor. Is it any less important for your other key office processes (for example, accounting and finance) to function effectively and efficiently? If you’re a service provider rather than a manufacturer, are quality and process improvement less material? (Of course not.)

How well does your company manage financial aspects like working capital, debt and investments, and leasing? These are as vital to a company’s success as efficient product design and production, yet few attempt to understand and improve finance processes to the same degree as, say, the product development process.

In fact, a lack of focus on finance is common, especially among privately-owned SMBs. Research shows that a majority of SMBs do not create capital plans, do not actively manage working capital, nor do they conduct analysis of financial statements.

Do you know if you’re making money on the cash you borrow? How about the assets you deploy, like accounts receivable, inventory, or cash? What about asset acquisitions you make? These are hard questions but they’re the kinds of questions you should be asking before you raise debt or equity capital.

What really represents the bigger threat to the success of your business:

• One of your Receivables staff borrowing 5-10 euros from petty cash when they’re short of cash and they want to go out to lunch on Friday? Or…
• Not having well-thought-out and consistent methods for managing high level finances that — if your financial situation suddenly and significantly worsened — could result in millions’ worth of losses?

The answer should be obvious.

A Financial Control System that Focuses on Improvement and Success

We’re not implying that businesses ought to ignore cash drawer controls. What we are suggesting is that focusing on low risk/low payoff components while neglecting key aspects doesn’t indicate a system of controls that appropriately addresses risk or that has its priorities in order.

Focusing on the mundane or trivial will do little to improve your overall financial performance! Internal control systems should be designed for continual improvement in key aspects of your operations, such as:

• Regularly reviewing and improving the overall capital structure;
• Using a capital plan to minimize the cost of capital while strengthening your debt/equity position;
• Managing working capital so excessive inventories and receivables do not sap your financial resources;
• Ensuring proper calculations and scenarios are explored while making debt & investment or leasing decisions; and
• Maximizing returns while minimizing costs for cash and merchant accounts.

A system of well-defined processes is not only about control or compliance: it is also about consistently striving to do a little better. Control systems that are designed only to achieve compliance are doing the bare minimum, which means they represent missed opportunities — opportunities to gain and keep a competitive edge, for instance.

That ought to be enough reason for any size and type of company to think about using the process approach to ensure continual improvement and an effective system of internal controls.

To help you build an effective system of internal controls for success, consider the Bizmanualz Finance Policies, Procedures, and Forms manual. Download a sample and see for yourself what companies like yours have saved in planning and development alone!

The second most important external user of a company’s financial statements is a bank (or other debt or equity institution). The financial institution will dictate the report needed. Copies of tax returns and company-prepared financial statements may be all that is required. On the other hand, the financial institution may require a higher level of assurance by requesting that an independent accounting firm either compiles, reviews, or audits the company’s financial statements.

In this case, the company might want to know what is required and the difference between these types of reports. Accounting policies and procedures for financial reporting would help. First of all, only Certified Public Accountants¹ (CPAs) who meet a higher peer review level and other reporting standards can issue these statements. A public accountant (PA), tax practitioner, or an accountant who is not a licensed CPA cannot issue such statements. Fully-licensed CPAs must keep their licenses current, with continuing education and documented peer review, to be able to issue opinions on these reports.

Compilation

A business owner will need to find a CPA with the necessary credentials to request a compilation, review, or audit.  The least expensive report, and one that should satisfy most banks for small and mid-sized business, is a compilation.  Essentially, the CPA reviews the financial statements prepared by the company and attaches an accountant’s report to it.  No further investigation is performed.

Interestingly, the standard compilation report issued by a CPA is nothing more than a glorified disclaimer, stating that the CPA is providing no financial statement assurance.  The AICPA defines a compilation as “a service where the accountant presents, in the form of financial statements, information that is the representation of the company’s management and owners without undertaking to express assurance on the financial statements.”

Review

A review involves essentially the same process as a compilation, except that the auditor does perform certain analytical reviews — reviewing account balances for reasonableness and questioning management about material modifications that might be made in order for the statements to be in conformity with GAAP².  In a review report, the CPA expresses a “limited assurance” — not an opinion — of the reasonableness of the financial statements and their conformity to a comprehensive basis of accounting, like GAAP, cash basis, or income tax basis reporting.

Audit

A financial audit provides the highest level of financial statement assurance.  An audit normally takes considerably more time than either a compilation or a review.  The audit work, itself, can fill several large binders of documentation for a small-to-medium-size business.

Every balance sheet account is proven, within the limits of materiality³. Direct confirmations of account balances are mailed from the CPA to banks, customers, vendors, and other debt holders to validate the balances of cash, accounts receivable, accounts payable, and other assets and liabilities.  If inventory is material, the CPA must observe the inventory counting as of the report date.  The CPA also tests the accounting procedures and internal controls, including computer controls.  All transactions are subject to audit under a statistical sampling formula.

A surprisingly large amount of time is spent in non-financial areas to determine any claims, lawsuits, contingencies, or other events that could harm the company. Incorporation and other organizational papers are reviewed; all leases, loan documents and other contracts are reviewed; and all minutes and other relevant correspondence are read.  The CPA also sends letters to all attorneys asking for full disclosure on any relevant matter.

The AICPA defines an audit as an engagement where a CPA provides an opinion about the fairness of a financial statement presentation in accordance with a comprehensive basis of accounting, such as GAAP, cash basis, or income tax basis.  This is a fairly simple statement for what can easily involve weeks of work for even a relatively well-structured small business.

It’s important to recognize the relative costs of these three types of reports.  If the cost of an audit is $12,000, a review for the same business might average $4,000, and a compilation, $3,000.  Relative to an audit, a review and compilation are considerably less expensive.  However, the difference in cost between a review and compilation is not nearly as great.  This is important to remember if faced with a requirement from a lender or investor.  If they request an audit, you might try to convince them that a review is adequate and certainly provides more assurance than a compilation.  This could save you considerable expense.

SEC – Audit

For publicly-held companies, an audit is the minimum level of assurance required.  In addition to the audit, there are other SEC reporting requirements, depending on the size of the business.  A full explanation of these SEC reports is beyond the scope of this article.

Internal Reports

Much emphasis has been given to financial statement reports — the balance sheet, income statement, and the statement of cash flows.  These three are the most important reports on the overall financial condition of the company over a given period of time.  A primary objective in developing policies and procedures over the accounting function is to improve the timeliness, accuracy and completeness of these statements.

A company’s accounting or information system can provide much more than those three statements, however.  Management should be encouraged to use the data available in the accounting system for other uses.  Financial statements are extremely useful; however, they only provide current valuation, and transactional information from the past.

A statement of cash flow, reconciling the sources and uses of cash, can be a useful starting point for extrapolating data that projects the anticipated sources and uses of cash needed into the future.  By analyzing changes in aging of accounts receivable and accounts payable, you can develop more reliable estimates and better anticipate future cash receipts and future cash payments.

The relationship between sales, inventory levels, and related costs of sales can be used to determine the anticipated needs for additional inventory related to projected sales.  Using the data captured by the accounting system every day, a projected cash flow report, updated daily, can be a powerful tool to alert management in enough time to properly react to anticipated additional working capital requirements.

With a powerful forward-looking cash management tool, like the described projected cash flow report, the projected activity levels in future months can be used to create budgets in the current and succeeding months.

With income statement projections, projected cash flow reports, and budgets, we have a truly interactive management information system.  Data collected from the past is used to project the future, fed back into the budgets, which control the present and determine the future.  This creates a continually updated management information loop.  This provides a business with the tools to act, not just react.

SUMMARY

We hope this introduction to your Bizmanualz™ Accounting Policies and Procedures manual will increase your appreciation of the importance of establishing effective accounting procedures.  Your business is a continuously flowing stream of transactions.  Like a sturdy, well-maintained net cast across a stream, effective accounting policies and procedures help trap data completely and accurately. Once collected, the real benefit is utilizing the data to provide the information needed to review the past, position the present, and chart the future.

NOTES

¹The “chartered accountant” designation is more common outside the USA.
²A number of accounting authorities, like the AICPA and the IASB, are currently working on convergence of GAAP with IFRS (international financial reporting standards).
³Information is material if its omission or misstatement could influence economic decisions made on the basis of the financial statements. Materiality depends, in part, on the size of the item or error, evaluated in light of the circumstances of its omission or misstatement.

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.

Bookkeeping

Bookkeeping and accounting share two basic goals:

• To keep track of income and expenses, thereby improving The Company’s ability to achieve profitability
• To collect the necessary financial information about The Company’s business to file required reports and tax returns

Bookkeeping refers to the actual transactional entering and recording of data.  Examples are writing checks, processing payroll, making deposits, recording disbursements and recording receipts.

Accounting

Accounting encompasses the broader responsibilities over developing and maintaining the accounting system under which bookkeeping functions are performed and generally falls within the top ten job responsibilties of a CFO.  Accounting is concerned with the timely and accurate recording of transactions, providing useful management information, and properly reporting such information for various user needs.  Developing and maintaining an accounting system involves setting up and maintaining an appropriate chart of accounts for the particular business.

Accounting policies and procedures are then established to provide guidance and internal control for all possible financial transactions, from source documents (checks, sales orders, etc.), to journals (payroll journal, cash disbursement journal, invoice register, etc.), to the general ledger, (based on the chart of accounts), and ultimately to a variety of reports for all internal and external needs.

Bookkeeping and reporting can be thought of as the input and output of a complete accounting system.  Accounting policies and procedures ensure:

• Integrity of the input data; and
• Accuracy and validity of the output report.

Reporting

Reporting, (the output of the data generated through various bookkeeping functions), is used for both internal and external purposes.  Internal Reports are reports used within the company, by both management and other designated personnel.  Internal reporting can be further divided into non-financial and financial data.

Non-financial data

Non-financial data includes a variety of measurement and productivity data, applicable to the specific business.  These can be daily customer count, web page “hits”, production activity per employee hour, units and total weight of product shipped, or even daily weather conditions.

Financial data

Examples of financial data reports include:

• Financial statements – Profit and loss reports (income statement), balance sheets and cash flow statements
• Daily reports with critical balances, such as, sales, cash level, inventory, accounts receivable and accounts payable
• Segmented profit and loss reports (or P/L) on specific jobs, profit centers or departments
• Register reports, listing all transactions for specific areas such as, payroll, checks, receipts, invoices, etc.
• Listings of source data files such as customer, employee, vendor and inventory lists.
• Aging reports for both Customers (accounts receivable or A/R) and Vendors (accounts payables or A/P)
• Inventory reports for costing and valuation
• Exception reports – open purchase orders, back orders, inventory stock outs.

External reports generated for the use of people or organizations outside of the business.  Generally, one of the more important users is the Internal Revenue Service (IRS) and 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 report most commonly requested of the company is the general ledger and related financial statements.

Report data and format will vary depending on user:

• Banks, lending institutions. To observe the financial viability of a business and to determine its ability to support additional amounts and types of debt financing
• Employees. To determine the stability of the business of their employer – this may be useful in wage negotiations
• Suppliers. To assess the suitability of granting credit terms to a business
• Existing and Potential Investors. To assess the potential risk of investing in a business and to monitor the status of existing investment in a business
• Public. To gain more insight into any business, which is legally required to make certain financial information available
• Government. To fulfill the requirements of all applicable local, state and federal reporting statutes, including income, sales, insurance, property, and payroll tax returns
• Media / Press. To use available business reports in specific trade and business publications

Accounting Software Program Structure

To navigate more easily in any accounting software it is important to understand the basic organizational structure that is common to all accounting software.  In spite of all the ancillary menu options and all the different terms used by competing accounting software products, there are really only three major components of any accounting software package:  Input, Output, and Maintenance.

Input refers to all of the “bookkeeping” tasks discussed above.  This includes entering invoices, checks, bills, payments, payroll, accounts payable and adjusting entries.  Each accounting software may “disguise” this input function under different names:  “tasks” or “activities”, or it may include specific input functions separately under each cycle area, or it may simply provide icon pictures of activities to be clicked on.  Regardless of the specialized “look” of the program, the most important and most heavily used routine in any accounting software is data input.

Output refers to all of the reporting functions of the program.  Once transactional data has been entered, the only usefulness in having it entered is the ability to retrieve it in a variety of report formats.  Generally, these reporting options are found grouped together under one menu, not surprisingly labeled, “reports”!  However, with some programs, they are scattered throughout the menus as appendages to each major cycle activity.

Maintenance encompasses the accounting tasks and can be broken down into two sub-categories:  utility maintenance and data file maintenance.  Utility maintenance refers to overall utility features like backup, restore, import and export data, fiscal year close, purge, or condense and repair data.  These are all usually found on one menu and are generally placed under administrative password control to prevent unathorized use.

Data file maintenance does require data input, but the input is not transactional.  This refers to the creation and maintenance of the chart of accounts (in support of the general ledger), the customer list, vendor list, inventory list and employee list.  These are generally found in one area usually labeled “maintain” or “lists”.  In other programs they may be separated and found within each module (i.e.: customer list in the accounts receivable module or revenue cycle).

Understanding how your own accounting software works, (where its input, output and maintenance functions are), is as important as understanding the actual double entry accounting that is occurring “behind the scenes”.  As you will discover throughout the Accounting Policies and Procedures Manual, you need to know how the numbers have developed and where they came from, in order to establish effective accounting policies and procedures to insure their integrity, accuracy and completeness for financial internal control.

Accrual Method

The accrual accounting method is defined as the method of keeping accounts which shows expenses incurred and income earned for a given period, although such expenses and income may not have been actually paid or received in cash.  Hence, the financial statements show revenues and expenses, even before any such revenues or expenses are paid.

The accrual method is the more acceptable and the more widely used because it correctly matches the earning process to the activity.  In other words, revenue is recorded when services or goods are rendered or shipped, regardless of when paid.

Cash Method

The cash method of accounting is familiar to most individuals since personal income tax returns are filed on the cash basis.  As the name implies, revenues and expenses are only recorded when the consideration paid actually changes hands.  This could be months after the actual event occurred.

Many small business owners prefer the cash basis due to its simplicity and ease of understanding.  At the end of any given period, the recorded net income will agree more closely to the change in the business’s cash balance.  However, when requesting financing from any bank or agency, business owners are generally asked to furnish financial statements, prepared on the accrual basis.  Clearly any “stakeholders” want to see the true effect on the financial statements of activities, as they occur, as opposed to when they are paid.

Many small businesses (under $1,000,000 in sales) may use the cash basis method for filing business tax returns, even if the business keeps its books on the accrual basis.  In a growing business, income taxes can be deferred for a year for revenues recorded from increases in accounts receivables.

Percentage of Completion Method

The percentage of completion method is a variant of the accrual method, used for businesses with long term contracts, primarily construction contractors.  Instead of valuing revenues based on services invoiced, contractors will adjust the revenue billed to agree with the estimated percentage of the total contract that has been completed to date.

Reporting Standards

Many transactions are entered routinely through the accounting system without much concern about reporting standards.  However, other transactions can be handled in different ways depending on a person’s judgment over the facts and circumstances.  For example, if a business decides to lease an expensive piece of machinery, how should it record lease payments?  Perhaps they should be simply charged to lease expense.   Do you have a lease policy procedure? Your accounting policies should clearly state how to record leases.

However, maybe the terms of the lease imply an obligation and the payments represent a pay-off of that obligation.  In that case, a portion of the payment should be applied to the debt and the other portion charged to interest expense.

The resulting financial statements would look different in those two cases.  The usefulness of financial statements would be severely limited if their presentation was based solely upon the preparer’s judgment.  Consequently, certain standards must be agreed upon and followed.

GAAP – Generally Accepted Accounting Principles

There was no commonly agreed upon standardization over accounting practices for within past accounting systems until after the great depression of 1933.  In response to the vast sums lost by investors in the stock market crash, the Securities and Exchange Commission (SEC) was established and given authority to set accounting standards for publicly held corporations.

In an effort to stave off further government regulation, the accounting profession, organized under the American Institute of Certified Public Accountants (AICPA), issued its first auditing standards in 1939.  This began its attempt at self-regulation, though the AICPA continues to work with the SEC and defers to the SEC on regulatory reporting requirements for publicly held companies.

Between then and 1959 the AICPA issued 51 authoritative pronouncements known as Accounting Research Bulletins (ARB) that formed the basis of what became known as generally accepted accounting principles (GAAP).  From 1959 to 1973 the Accounting Principles Board (APB) issued 31 additional standards.

In 1973 a new full-time independent body, separate from the AICPA was created, called the Financial Accounting Standards Board (FASB).  This board has issued over 147 Statements of Standards by the end of 2002.  These standards, along with official interpretations, Accounting Research Bulletins (ARB), previously issued pronouncements, SEC rulings, industry guides, and other exposure drafts make up the current basket of generally accepted accounting principles.

The Matching Principle

Woven through all of the GAAP pronouncements are several universal principles.  One is the concept of matching.  Accrual and percentage of completion methods represent attempts to more properly match the financial statement presentation to the actual transactions that have occurred.  Revenues are matched to services performed and product sold, and expenses are matched to activities that have incurred expenses.  This is why accrual based reporting conforms to GAAP and cash based reporting does not.  The matching principle is a keystone of generally accepted accounting practice.

Conformity

Conformity is another widely used concept in accounting.  The method of implementing percentage of completion, for example, should be the same for all companies.  Only by practicing conformity will there be comparability.  Investors, lenders and business owners, could not properly evaluate the success of a particular business as compared to the rest of its industry, if all businesses used different methods for recording transactions.  Conformity is another fundamental principle in GAAP.

Valuation

A common consensus in GAAP reporting is the agreement that financial statements are valued on an historical basis.  This is an important concept that provides for consistent conformity.  As an example, real estate is valued at its original cost, not what it might be worth on an appraised value.

Accounting board pronouncements have continued to modify this principle to make financial reports even more conservative than historical basis, by requiring a downward adjustment, if the potential selling value has fallen below the original cost.

An example is inventory, when obsolescence reduces its value below its original cost. Another example is the yearly devaluing of fixed assets through depreciation.  Each year the original cost of a building or equipment is lowered by writing off a portion of its expected life and expensing it to depreciation.  Other assets like accounts receivable are reviewed and written down to their expected realizable value by charging off any amount deemed uncollectible to bad debt expense.

The overall attempt is to present financial statements on the most conservative basis possible.  The objective is to ensure that the net worth recorded on a company’s financial statements is never more than the true value of a company, based upon the lower of historical cost or the expected realized selling price of its assets minus its liabilities.

Events in the early years of the 2000′s have shown how important this objective is.  In spite of all the GAAP pronouncements in place, “creative accounting” techniques that push the gray areas of accounting valuation issues have resulted in significant, previously undisclosed impairments to the financial statements of companies like Tyco, Enron, and WorldCom.

Inventory Valuation

Inventory valuation is a specially treated area that deserves specific mention.  Inventory is always valued at the lower or cost or market (realizable value, net of selling costs).  However, cost can be determined in three different ways.

First In – First Out (FIFO) values the cost of inventory based on the principle that the first item purchased is the first item to be sold.  Visually, this method mimics a store owner’s method of stocking shelves by putting its most recent purchases at the back of the shelf, so that the older product is sold first.  Hence, the value of the amount of inventory on hand, always represents the cost of the very latest purchases.  In a true FIFO valuation, each purchase is tracked as a separate layer with its own cost.  Sales are also tracked and taken from one or more specific layers.

A variant on the FIFO method is the Average Cost FIFO method, which eliminates the need to keep track of separate purchasing layers.  The cost of each new purchase is added to the “pool” which changes the overall cost of the “pool”.  Sales are then taken from this single “pool”, leaving a value of the inventory on hand that closely resembles, but not necessarily equals, the value of inventory on a true FIFO method.

A final method of valuation is based on Last In – First Out (LIFO).  This is the opposite of FIFO: the last items purchased are deemed to be the first items sold.  This means that the ending inventory value is comprised of the very first items purchased.  This value could be lower than the FIFO value, particularly in inflationary times.

One might ask how two opposing methods of valuation could both be allowed under GAAP, particularly, when this would seem to violate the important principle of conformity.  This is one of many good examples of the challenge to create a consensus of opinion when there are several options, which have equal justification and support.  Accounting principles are not static laws handed down from the mountaintop, hence the term, “generally accepted”.

In this case, there is current justification and support for either method.  In deference to conformity, GAAP provides that financial statements valuing inventory on LIFO are to include a footnote reference, which discloses the valuation difference between LIFO and FIFO.  This is one of many compromises that provide conformity over different methods of valuation.

Materiality

A final important concept in all of GAAP is materiality.  Surprisingly, coming from a group of professionals known for their penchant for chasing down pennies, every pronouncement contains a materiality clause that allows for non-compliance in any area, if the effect on the financial statement presentation is clearly immaterial.  In other words, if the effect is minimal or does not represent a significant change in the financial position of the account then it might be considered immaterial.

Balance sheet

Contains accounts whose value is determined at a specific point in time.

Assets – accounts with value that you own

• Cash – the amount on hand or in the bank at a specific point in time
• Accounts Receivable – how much people owe you
• Inventory – the value of business merchandise for sale
• Fixed Assets – the value of property and equipment

Liabilities – accounts with value that you owe to others

• Accounts Payable – how much you owe others for unpaid purchases
• Debt – how much you owe others for money borrowed
• Other Liabilities – services or money owed to others

Equity – accounts with paid in capital or earned from profits.

• Contributed Capital – money invested in business by ownership
• Distributions – dividends and other types of money paid out to ownership
• Capital Stock -            money invested in exchange for company ownership
• Retained Earnings – earnings retained in business from net profits

Income Statement

This statement contains accounts whose value is determined over a period of time (e.g., day, week).

Income: total sales and income recorded over a period time

Expenses: total purchases and other expenses recorded over a period of time

Basic Accounting Formula

All transactions are posted to one or more of these accounts.  As discussed earlier, every posted transaction must balance.  That is, debits must equal credits.  Furthermore, the result of every posting, if done correctly, will never put the Basic Accounting Formula out of balance.  Asset accounts will always equal the total of all liability and owner equity accounts.  If this formula is ever out of balance, the cause will always be an incorrect transaction posting where debits did not equal credits.

Assets include those accounts, which give value to the company: cash, accounts receivable, inventory, property, etc.  Liabilities are those accounts which reduce the company’s value:  accounts payable, debt, and other liabilities.  If total assets are greater than liabilities, then this net value (that is, the total of all assets minus liabilities) represents the true value of the business, otherwise known as its Equity. Hence, the Basic Accounting Formula can be expressed and equally understood in these two ways:

Assets = Liabilities + Equity

or

Equity = Assets – Liabilities

If the company’s assets are less than its liabilities, then it will necessarily show a negative equity.  This makes intuitive sense to anyone following the demise of a business in bankruptcy.  When a business owes more than it has in value, the resulting negative equity is an obvious warning sign.

The equity accounts include owner’s contributions, distributions, and retained earnings.  Retained earnings operate in a manner unique to all other accounts.  It contains the net effect of postings to all income and expense accounts.  It is truly the one account, which links the balance sheet accounts (assets, liabilities and owner’s equity) with the income and expense accounts.

Understanding the importance of retained earnings, the Basic Accounting Equation could be expanded thus:

ASSETS  =  LIABILITIES  + (Investor and owner contributions, and distributions + Retained Earnings)

OR

ASSETS  =  LIABILITIES  +  (OWNER’S EQUITY ACCOUNTS +  INCOME – EXPENSE)

———————EQUITY ———————————

When a transaction, like writing a check or paying a bill, is executed in an accounting program, the software is designed to take this transaction event and create the proper and necessary debit and credit entries to record the effects of the transaction in the appropriate journals and general ledger accounts.  Your accounting policies and procedures should help you acheive accounting control.

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.

Various reports, including financial statements, can be prepared from the data collected in the GL.  Corrections or necessary adjustments can be made to the general ledger by creating adjusting journal entries, posted to the general journal.

1. Revenue Cycle

Order Entry. Invoices entered through direct entry, sales orders, or a point-of-sale (POS) system, such as a cash register, are posted to the sales journal.  These entries also accumulate on the accounts receivable ledger, organized by customer.  If the business maintains an inventory, the posting of sales also affects the inventory ledger. Finally, all sales journal activity is also posted to the GL.  A discussion of your revenue cycle should be covered in your revenue procedures.

Cash Receipts / Deposits. Receipts on sales and other bank deposits are posted to the cash receipts journal.  Sales receipt information also accumulates on the accounts receivable ledger, organized by customer.  These postings are also entered on the bank account ledger.  Finally, all cash receipts journal activity is also posted to the GL.

Accounts Receivable. Accounts Receivable is a separate journal that records both sales and cash receipt data by customer.  The data comes from the postings to the cash receipts journal and the sales invoice journal.

2. Purchase Cycle

Purchase Orders / Purchasing. Invoices entered through direct entry, or through purchase orders, are posted to the purchase journal.  These entries also accumulate on the accounts payable ledger, organized by vendor.  If the business maintains an inventory, the posting of purchases also affects the inventory ledger.  Finally, all purchase journal activity is posted to the general ledger.

Cash Disbursements / Checks. Payments on account or for expenses are posted to the cash disbursement journal.  Payment on account information also accumulates on the accounts payable ledger, organized by vendor; these postings are also entered on the bank account ledger.   Finally, all cash disbursement journal activity is posted to the general ledger.

Accounts Payable. Accounts Payable is a separate journal that records both sales and cash receipt data by vendor.  The data comes from the postings to the cash disbursement journal and the purchase journal.

3. Payroll Cycle

Payroll data by employees are entered into the payroll journal.  These postings are also entered in the cash disbursements journal and the payroll ledger.  Finally, all payroll journal activity is also posted to the GL.

4. General Journal Cycle

Corrections or adjustments to the above major transaction cycles can be made through adjusting journal entries, posted directly to the general ledger. These are also compiled in a separate journal, known as the “general journal”.

How Does “Posting” Work?

The specific postings, as outlined in the cycles above, do not necessarily take place as separate steps, especially in computerized environments.  There are only two basic posting methods in computerized accounting systems: real-time and batch posting.

In real-time posting, the source transaction (check, bill, payment, receipt, etc.) is posted to the specific journal and any related subsidiary ledger (e.g., accounts receivable, accounts payable, inventory) and is simultaneously posted to the general ledger.

In batch posting, the journals and subsidiary ledgers are posted, but entries are not yet posted to the general ledger.  Posting these journals to the general ledger is done separately.  Typically, a group of transactions (often a full day’s worth) is entered.  Later, after the journals are reviewed for accuracy, this entire day’s group, or “batch”, is posted to the general ledger.

To understand this posting process better, it would be helpful to follow specific transactions through a sample company.  First, however, we need to define various accounting terms and concepts.

Accounting Terms and Concepts

Double-Entry Accounting

We can thank the 14^th and 15^th century Italian merchants for developing the double-entry system of accounting that we still use today.  It is widely believed that Benedetto Cotrugli (aka, Benedikt Kotruljevic) was the first to document this concept of double-entry accounting (in his accounting policies and procedures, perhaps?).  In 1458, he wrote Delia Mercatura et del Mercante Perfetto (Of Trading and the Perfect Trader), which included a brief chapter describing many of the features of double-entry accounting.

In 1494, Luca Pacioli, from San Sepulcro in medieval Tuscany, published the Summa de Arithmetica‘s 36 short chapters on bookkeeping (entitled De Computis et Scripturis, or “Of Reckonings and Writings”) so the subjects of the Duke of Urbino could learn how to conduct business and provide the trader with a fast, accurate method to determine his assets and liabilities.

For many centuries before this, commercial transactions had been recorded — journalized — on paper, papyrus, or clay tablets.  However, these journals provided only totals of transaction groupings. It was the Italians who first recognized that it is impossible for a business transaction to occur without affecting at least TWO accounts. There can never be only one effect from a transaction — there has to be balance.

An Italian farmer sells wood to a shipbuilder for 400 ducats. To account for this transaction, he would record, “wood sale – 400 ducats”. His “sales” account has increased by 400 ducats. But, what else has happened?  What other account was affected? His “cash” account also increased by 400 ducats.

What if he sells his wood to the shipbuilder on credit and receives no cash? In this case, it’s his “accounts receivable” account that increases by 400 ducats.

There Are Always Two Sides – at Least – to Every Transaction

Later, when the shipbuilder pays his debt to the farmer, the farmer records an increase in his cash account and a decrease in his accounts receivable by 400 ducats each.  You can see that an integral feature of the double-entry method is that transactions must equal. At the time, this new method was heralded as an astounding discovery and was described as “a magic mirror, in which the adept sees both himself and others.”

Today, double-entry bookkeeping is used for recording a transaction in two or more different places, or ledger accounts.  This practice simplifies finding errors since the totals of both ledger accounts should agree.

Debits = Credits

Bookkeeping entries are divided into debits and credits. The debit side is typically the left side of the ledger page and credits are on the right.  The origin of the words “debit” and “credit” come from the simple concept: “who owes you” and “to whom you owe”.

Debits are transactions relating to purchases, expenses, or increases in an organization’s assets. Credits are transactions related to revenues, or an increase in the firm’s equity and liabilities. Recording a transaction requires a debit and a credit entry.  If the entries are correctly recorded, the totals on both sides of the ledger agree.

The double-entry bookkeeping method — listing debits in one column and credits in the other — requires that the debit and credit columns add up to zero. The double-entry bookkeeping method is still the basis for tracking financial affairs, almost six centuries .   The following list illustrates the effect of posting a debit or credit entry on each major account type:

These account types are the general account classifications used in all accounting systems.  They are also used to organize the general ledger, from which financial statements are developed.  Your accounting policies and procedures should take into account the main accounting cycles, accounting methods, and accounting terms to guide the operation of your accounting system.

On one hand, popular accounting programs for small and mid-sized businesses have become more widely used than ever before.  On the other hand, industry consolidation has significantly reduced the accounting program choices to a handful.  These choices are typically inexpensive, easy to implement, and come with little support to develop appropriate accounting policies and procedures to ensure that the data generated by these programs is accurate and complete.  Entry-level software like Quickbooks® and mid-level software like MAS-90 or Great Plains share this common deficiency.  “Support” documentation is long on the explanation of user features and short on accounting policy and procedural advice.

Accounting Systems – The Recent Past

Only twenty years ago, small to medium sized businesses faced daunting choices for selecting an accounting system.  There were only three choices:  Continue to use a full manual system (a comprehensive pegboard “one-write” system, employing many journals anchored to an imposing cloth bound general ledger book that rivaled the size of the largest Webster’s Dictionary); purchase or lease a computerized accounting system; or build your own automated system.

The manual systems were not trivial.  They were produced by major firms, which provided on-site implementation and training.  These systems were well documented with many accounting policies and procedures built into the regimented use of the “one-write” journals and corresponding ledgers.   Internal controls were manual at best.

An alternative decision was to purchase or lease an automated accounting system.  But this required another decision of whether to buy a “ready made” product or build your own.  To make this decision, the company would typically hire a consultant or CPA firm to perform a comprehensive “needs” analysis.  The consultant would eventually select, either a commercially built multi-module accounting program (like Solomon, our Real World), or a programmer to develop the structure from custom code (RPG was a popular language used to create custom accounting programs).

Either one of these alternatives would have to run on a leased or purchased dedicated mini-computer system, (the IBM 36 was the popular mid-size business choice for many years).  Both solutions required tremendous resources in time and money.  Even the “ready made” solutions required plenty of additional programming to fit it into the specific company’s needs.  For a half a year or more, various consultants, programmers and specialists would write code, test and rewrite code.

In either case, documentation was paramount.  Hence Accounting Policies and Procedures, as they applied to the mechanics of the accounting system were well documented as a by-product of the installation and implementation process.  The total costs in the purchase or lease of the hardware and software (ready made or custom built), and in the company’s own human resources, was staggering.

Accounting Software – The Present

Imagine the months of decision making preparation, the months of development, the reams of Accounting Policies and Procedures documentation, and the total costs that easily went from tens of thousands to hundreds of thousands of dollars.  Compare this with current practice: The company owner (or the controller or other designee) walks into a local retailer, picks up a copy of the most successfully marketed accounting software package (i.e., the one occupying prime shelf space), drives back to the office, and loads the program on any available PC.  There you have it – the decision making process, needs analysis, implementation, and installation, all for one low price…or is it?

None of these accounting programs comes with supporting accounting policy and procedure documentations.  Internal controls do not exist and require manual processes and extra paperwork.  Your accounting software does not come with support  to help in your compliance with Sarbanes Oxley.  Of course you can develop your accounting policies and procedures yourself, from scratch.  But, this take a lot of time and expertise.

Accounting Practices – The future

The future begins today, with your purchase of this Bizmanualz™ Accounting Policies, Procedures and Forms.  This manual is needed more now than ever.  Accounting systems are more accessible than ever before.  Unfortunately, they come with no instructions.  The user guide that comes with the accounting software only explains what the menu options do, it doesn’t explain which options result in sound accounting practices.

Accounting software is looking more and more like your own internet browser home page, (no surprise since each manufacturer is competing to be your primary web portal).  New Accounting Software as a Service (SaaS) applications will make this a reality.  But, in the process, the actual functions of accounting are less obvious, and as a result, less understood.

This article series will take a look behind the scenes of the “splash screen”.  Hopefully, by understanding the concepts and consistent accounting rules utilized by all accounting software programs, you will develop more confidence to rely on the information generated by the program, you will have a deeper appreciation of the importance of accounting policies and procedures for internal control, and you will be able to use it more effectively to run your company.

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!

A weak “Sure, boss…” escapes from your lips as “el jefe” turns and leaves, but an instant later, you’re thinking, “No way!”  You can’t possibly get all your accounting processes documented that quickly!  Or can you?

Break Down the Documentation Process into Its Component Parts

Start by mapping out the business process you need to document.  The process map acts as an outline for your procedure writing: you have to know the steps in the process that need documenting before you start writing.  With process maps in hand — one for each business process — you’re ready to start writing procedures.  Here’s where using pre-written procedures can save you time.

How You Can Use a Pre-Written Procedure to Save Time

If you’re looking for sample accounting procedures for your accounting processes, the Bizmanualz CFO Accounting Policies-Procedures Manuals set contains many sample accounting procedures you can use as starting points.  The CFO bundle contains 239 prewritten accounting procedure templates and 373 accounting forms, organized into five functional areas, or business manuals.  The CFO set covers the ten core accounting cycles.

Once the manuals arrive, the next step is “find an example procedure – a model for the one you need to write”.  All Bizmanualz procedures are in Microsoft Word format and can be easily tailored to fit your specific business process.  Let’s say you’re writing a procedure for vendor acquisition, or the “new vendor” process.  Where would you start?

The vendor process map you wrote shows eight steps:

1. Evaluate business requirements;
2. Identify qualified vendors;
3. Interview, Inspect and test vendor;
4. Review results and approve vendor;
5. Order from vendors;
6. Log orders and delivery performance;
7. Review performance against specifications; and
8. Vendor-related corrective and preventive actions.

Accounting Manual Index

The Accounting Policies, Procedures, and Forms manual contains a Vendor Selection procedure that you can customize.  How do you find it?  In the back of the manual, you’ll find the “Index”.  Search the index for your keyword, “vendor”.  (You could also look through the table of contents in the front of the manual.)  You find the Vendor Selection procedure, containing three steps, or activities (Vendor Selection, Vendor Inspection, and Vendor Files), in the “Purchasing” section.

Your process consists of eight activities, so you expand the prewritten procedure, adding the other five steps, or otherwise modify the Bizmanualz procedure to reflect your actual situation.  Add your process map (a handy visual aid) to the front of the procedure, and you’re done!

Writing a new procedure can take between 4 and 40 hours, depending on the complexity of the process you’re documenting and whether forms are required.  The complexity of a process, as well as your level of expertise in that subject, determines the amount of research — into standards, laws or regulations, references, and the like — you need to do.  Forms also require time and effort to research and produce, assuming you don’t already have them.  The Bizmanualz Vendor Selection procedure contains six pages of forms, including a detailed vendor inspection checklist.  Many Bizmanualz procedures also include a “References” section, which can help you as you research certain topics.

Let’s say this is a 40-hour procedure to create, with forms.  If you use the Bizmanualz procedure, with minor modifications you could have the same procedure ready in less than a day, saving yourself a great deal of time (and your eyes, a lot of wear).  Using a single procedure, saving 38 hours of time off the 40 you planned on, practically pays for the entire five-manual CFO series.

And you’re going to find more than one procedure you can adapt to your business requirements.  Most companies find dozens of useful procedures, which translates to hundreds of hours of time saved, before you factor in the opportunity cost of waiting for the procedures to be completed.

So, the next time you need to write procedures fast, take a look at the complete collection of Bizmanualz business policies and procedures.  Get your procedures project done now…before the end-of-month deadline your boss gave you.

Last week, we identified three elements that drive up your cost of compliance: cost of improvement, cost of review, and cost of scale.  Your cost of improvement can be managed by the improvement projects you choose.  Your cost of review is a relatively fixed, ongoing yearly expense, based on your cost of scale.  Your cost of scale defines how expensive your entire compliance program will be, now and in the future.  Ergo, the more procedures you write, the more expensive compliance becomes.

How Do You Keep Your Compliance Costs Under Control?

Writing procedures for internal control can produce diminishing returns.  Every procedure written carries with it a lot of overhead.  Overhead in this case consists of more than the original documentation effort — the design and development.  It includes implementation and review — document control, training, usage, auditing, management review, and regular updates.

Writing more procedures costs more money; it also reduces risk, but only up to a point.  The point of diminishing returns is where the time and effort you spend on a task stops yielding rewards.  You reach a break-even point, and when you reach that point varies according to your situation.  The common perception is that as you write more procedures, you reduce risks (compliance risk, for instance) further. This would be true if you followed all implementation steps; the reality is that most companies do not follow all implementation steps.

Any implementation step you leave out increases your risk; you lose all the intended benefits of your procedures.  You might think you’re saving money by foregoing certain steps in the implementation process.  Think again.  The opportunity for quality defects, customer complaints, and material weaknesses rises when you take shortcuts.  The likely result is a corrective action loop due to user complaints that your policies and procedures don’t work.

Starting with a clear, compact scope is key to controlling your compliance costs.  The size or scale of your operation — the number of operating locations, number of employees, and the number, complexity, and interconnections of processes — means more risk management, internal controls, and processes to be understood, documented, and controlled.   Learn to pick your battles — focus on the most important processes first!

Map out your core processes with a “big systems perspective” process map.  ISO 9001 certification requires six procedures — document control, record control, internal auditing, control of nonconformities, corrective action, and preventive action — so if ISO 9001 certification is what you’re after, start with those processes.    Sarbanes-Oxley compliance is risk-based, so identify the greatest risks to your company, prioritize them, and write procedures that address those risks first.  This will give you the greatest return on your procedure investment.

Quality defects are to ISO 9001 as financial risks are to regulations like the 8th EU Directive and Sarbanes-Oxley.  You can reduce the scope of your compliance program by addressing the areas with the most defects or the greatest risks first.  As legislative bodies and enforcement agencies have often said, you shouldn’t try to address everything all at once.  Start by reviewing the materiality of the defects or risks to your company.  Decide on a threshold, or cutoff, for materiality.  Don’t worry if you miss the mark on your early attempts: Improvement is an ongoing process, not an event.

Be agile and think about the speed of your procedures implementation.  Most process procedures projects stall because they’re overtaken by current events.  Immediate business needs take precedence, of course, but you risk losing focus and that sense of purpose with your procedures project when you shelve it, so you’re less likely to achieve compliance or those other benefits you were looking for when you took on the project in the first place.

Only write procedures you know you can implement fully.  A written procedure nobody uses is worse than none at all, because of the wasted effort.

Starting with a manageable scope will help you realize your goals and keep your compliance costs down. Work through your procedures incrementally; next year, lower your risk threshold and address more risks, then a few more the year after, and so on, until you’re comfortable.

Management decides on the internal controls needed to cover the identified defects and risks.  If they decide wrong and pick a threshold that’s too high, you’ve identified a material weakness in your quality or risk control framework.  That can be a very good thing, as long as you work on improving your internal controls.  Do so, and you have a working management system that ensures compliance.  Isn’t that what you wanted in the first place?

Using prewritten procedures saves time researching, writing, and implementing accounting policies, procedures, and internal control.  Download free samples now and get started on your procedure development project today!

If you qualify as a non-accelerated filer (i.e., your company’s public float is under $75 million), you’ll have to start complying with Section 404(b) of SOX, which requires company management and independent auditors to sign off on, or attest to, the effectiveness of your risk control framework or accounting policies and procedures for internal control.  Are your processes protecting you from the risk of material misstatements (RMM)?

Sarbanes Oxley Compliance Costs Too High?

When it was first enacted, the Sarbanes-Oxley Act (SOX) did not apply to non-accelerated filers because it was believed SOX compliance costs would be too high.  Several delays and extensions have been given to non-accelerated filers because the Office of Economic Analysis (OEA), which advises the SEC, needed to complete a study on SOX compliance costs. The study was completed in September, 2009, and was quickly followed by the announcement (on October 2) of the June 15th compliance deadline.

It didn’t surprise anyone when the OEA study showed that SOX compliance costs increase with company size; the study also confirmed that annual compliance costs decrease over time and that, overall, compliance costs have decreased since 2007.  In other words, while larger companies achieving SOX compliance had higher costs overall, there are fixed SOX compliance costs that impact all organizations, regardless of size, and companies have gotten smarter on how to implement Sarbanes-Oxley.

How Do You Control Sarbanes-Oxley Compliance Costs?

There are three major factors that drive up the cost of complying with SOX: cost of scale; cost of review; and cost of improvement.  The more control you have over all three of these, the lower your costs to implement Sarbanes-Oxley compliance will be.

Sarbanes-Oxley Cost of Scale

Why do larger companies incur higher overall compliance costs?  Because of the sheer size — scale – of their operations!  More operating locations, more employees, and more processes means more time and people needed to review accounting policies, procedures, and internal controls.  There is no easy answer to the question of scale: larger size translates into more risk management, internal controls, and accounting processes.

You can reduce the scope of SOX compliance by addressing the greatest risks first (note that PCAOB Auditing Standard #5 was developed for this purpose).  Don’t try to address all risks at once — this is what drives up compliance costs.  But, which risks do you address first?  Determine a threshold, or cutoff, for risk materiality, then decide which risks are most material to your company.

Remember — this is an ongoing process of improving your SOX compliance, not a one-time SOX compliance event.  Next year, you can (and probably should) lower the threshold and address your “second-tier” risks, and continue to annually adjust your threshold until you are comfortable.  Management decides on the internal controls needed to cover the identified risks.

Also, if you decide wrong and set your risk threshold too low or too high, you’ve identified a material weakness in your risk control framework.  You think you’ve exposed a flaw in your system, but consider that your system is also about continual improvement.  The only flaw is failing to improve: work on improving your internal controls – adjust your risk threshold – and you can demonstrate that you have a SOX-compliant system.

Sarbanes-Oxley Cost of Review

The cost of review represents the Check and Act phases of the Plan-Do-Check-Act (PDCA) process approach.  All companies needing to comply with SOX have to have some form of review process that tests accounting’s internal controls and gives management the confidence to attest to the validity of the company’s financial statements.

Internal audits, management reviews, management and auditor attestation, and board oversight are fixed costs of Sarbanes-Oxley compliance.  Every company has to operationally demonstrate to top management that internal controls are in place and are working.  Larger companies have to spend more, of course, but every company must spend a minimum amount for basic compliance.

As with the cost of scale, you can reduce the scope of SOX compliance by addressing the largest risks first in your audit plan.  You don’t have to audit every accounting process every year.  Start with the accounting processes that have the greatest impact — those that pose the greatest risk of material misstatement if they don’t work.  Review past audit opinions, your compliance plan, and your definition of materiality and adjust your audit plan to deal with the greatest risks.

Management decides on the internal controls and testing needed to ensure that the identified risks are controlled.  If you find that your audit plan hasn’t addressed the right risks, you adjust the plan.  Again, lessons learned — and implemented — show that your system is driving improvement and is, therefore, Sarbanes-Oxley-compliant.

Sarbanes-Oxley Cost of Improvement

The cost of improvement comes under the “Plan” and “Do” phases of the PDCA process.  Sarbanes-Oxley compliance starts with a compliance plan, one that identifies the risks you need to control.  Your compliance plan is the foundation of your risk control framework.  With a sound compliance plan in place, management can make better decisions regarding internal controls, such as implementing accounting policies and procedures that reduce or eliminate the risk of material financial misstatement.

Developing accounting policies and procedures is the “Do” in “Plan-Do-Check-Act”.  Your risk control framework identifies individual risks (e.g., the chance a receivable is not collected on time). Your accounting policies (e.g., collect accounts receivable within 30 days) and procedures (daily A/R aging reports, phone calls, collection letters, etc.) are forms of internal control that demonstrate your compliance with Section 404 of SOX.

Are your accounting policies and procedures for compliance, or control?  Well, control comes before compliance, but many companies have confused the two and wasted a lot of time and money.  You can reduce the scope of SOX compliance by controlling your greatest risks first with your accounting policies and procedures.

You don’t have to write a policy or procedure for every accounting process at once.  Once again, start with the accounting processes that, if they don’t work, pose the greatest risk of material financial misstatement.  Review audit opinions, your compliance plan, and your definition of materiality, then develop and implement the accounting policies and procedures that address your greatest risks first.

Management makes the final determination of which accounting policies and procedures are needed.  If you develop cash policies and procedures that do not (adequately) control the identified risks, you have a material weakness.  Improve your accounting procedures for internal control and you demonstrate Sarbanes-Oxley compliance.

Bizmanualz Accounting Policies and Procedures Reduce Sarbanes-Oxley Compliance Costs

Sample accounting policies and procedures serve as a model, or framework, for your own accounting policies and procedures.  The CFO Accounting Policies and Procedures Manuals set contains 239 procedures you can use to address the ten accounting cycles.

SEC Chief Mary Schapiro recently stated that “there will be no further Commission extensions.  It is important for all public companies – and their auditors – to act with deliberate speed to move toward full Section 404 compliance.”  Although legislation has recently been introduced to permanently exempt non-accelerated filers from Sarbanes-Oxley Section 404(b) compliance, there’s no guarantee that Congress will act or that the public won’t demand better information and you won’t need to comply with 404.  Besides, having an effective system of internal controls makes good business sense.

Using prewritten procedures will save you hundreds — possibly thousands — of hours in researching, writing, and implementing accounting policies, procedures, and internal control for Section 404 compliance.  Save even more time implementing additional internal controls for sales and marketing, security, disaster recovery, and ISO 9001 compliance using the CEO Company Policies and Procedures Manuals.  Download free samples of our procedures and judge for yourself.