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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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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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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In the past few weeks we have discussed how understanding and documenting your cash processes with cash policies and cash procedures can prevent internal fraud and abuse.  Externally, one the biggest threats to your cash are customers who fail to pay for what they purchase. 

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We all hope our co-workers and employees are honest, and they probably are.  Yet, improper cash control and poor cash practices can tempt people who are basically honest.  Think about parking at the local mall.  You always roll up your windows and lock your car to protect your possessions, especially if you made some purchases at an earlier stop.  Most of the people who walk by your car at the mall are honest, yet you don’t want to tempt them by making it easy to take something that doesn’t belong to them.

Cash Security Is About Prevention

The same idea applies to your cash process; you want to use best cash practices and follow proper cash procedures.  In business you can reduce cash risk with good cash controls through removing opportunity and temptation.  While your employees may be honest, sloppy cash control is like leaving your car windows down at the mall… you are just begging for something bad to happen.

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Small and medium-sized businesses rely on a steady, consistent stream of incoming cash – customers paying for goods and services with cash, checks, and credit cards. Many retail and service businesses have multiple people conducting cash transactions throughout the day. Creating a cash policy and cash procedure for important cash handling processes like cash drawer management, end of day closing, or cash in deposits, can be vital to protecting the life blood of your business.

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Question of the month: How can Accounting Policies and Procedures help your organization?

The Accounting Department is an area where policies and procedures are usually a requirement, because they are considered part of the internal controls noted in Sarbanes-Oxley. The real question is: What approach are you taking to developing accounting policies and procedures?

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Everywhere in your organization people are carrying out business processes to make things happen. It doesn’t matter if the processes are well defined, poorly documented or if the staff is trained. If things are getting done – it is because people are executing business processes.

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