Accounting Best PracticesFifth Edition_9 doc

This approach to catastrophe coverage is especially useful when tional insurance coverage is too expensive, allowing issuers to essentially extractinsurance coverage from the securities

A provider of webcasts is Thomson Financial, whose Thomson/CCBN

sub-sidiary can be reached at www.thomson.com/financial This company facilitates

web-casts by setting up basic audio webweb-casts for quarterly conference calls; it also offers

an enhanced audio webcast that is set up through a separate Web page that looks like

a page from a company’s regular Web site but that has special features, such as a timedelay on the broadcast and access to detailed audience reporting, in order to find outwho has monitored the webcast The company also offers an advanced feature called

“Virtual Presentations” that synchronizes audio presentations with PowerPoint slides,using its TalkPointTMtechnology This option can be used for other purposes, such astraining presentations, product demonstrations, and advertising

11–12 Automate Option Tracking

When a large number of employees have company options, either the finance orhuman resources department will be the target of ongoing questions about the vest-ing, valuation, and tax implications of these options Because the tax laws are socomplex in this area, employees keep returning with follow-up clarification ques-tions, as well as to run what-if scenarios on what they should do under various cir-cumstances Given a large number of employees with many option grants, this canturn into a major drain on company resources In addition, a company runs the risk

of giving bad advice to its employees, which may have legal repercussions ifemployees using this advice lose money through the exercise of options

A solution for larger companies is to purchase an options tracking package,which they can use alternatively as an in-house solution or as a featured service onthe external site of an application service provider An example of such software

is Express Options, which is sold by Transcentive, Inc The system stores alloptions information in a single database, allowing one to handle multiple granttypes, determine vesting schedules, track option exercises and cancellations, andprovide employees with tax-related information It also calculates option valua-tions, exports data to the company stock transfer agent, and provides a variety ofreports for regulatory purposes By using Transcentive’s add-on product, ExpressDesktop, employees can access such information about their options as portfoliovaluations based on different stock pricing assumptions, what-if modeling, trans-action histories, and frequently asked questions They can also place orders to exer-cise their options through the system

For this type of service, one can expect to pay a minimum of $15,000 ally, with the price exceeding one-third of a million dollars per year for largerinstallations Given its cost, this best practice is most applicable to corporationswith at least several hundred option holders

11–13 Use Internet-Based Options Pricing Services

Any accounting or treasury staff that deals with options knows that this is a cult area to analyze in terms of whether an options price is reasonable or exces-sive One can now gain assistance in this effort by accessing the excellent

diffi-www.ivolatility.com Web site This site compares the historical volatility of a stock

to its estimated activity for the next few months, as determined through an ination of options purchased If the forward-looking volatility is greater than thehistorical volatility, then the options on that stock may be overpriced The sitealso includes daily charts and statistics about market performance, as well as link-ages to news sources for each selected stock

11–14 Automate 401(k) Plan Enrollment

In smaller organizations, the accounting department is tasked with the ment of 401(k) plan additions, changes, and deletions This is not an efficientprocess, for someone must arrange for a meeting with each employee who hasnow been working for the minimum amount of time, as specified in the plan doc-umentation, explain the plan’s features to them, wait for them to take the planmaterials home for review, and, finally, enter the returned documents into the sys-tem of the 401(k) provider This is a lengthy and time-consuming process

manage-An alternative is to automatically enroll employees in the 401(k) plan This

is also known as a “negative election,” since an employee must make a decision

not to be enrolled in the plan, rather than the reverse This approach has the

con-siderable advantage of reducing the paperwork needed to enter a person into the401(k) plan, since it is done as part of the hiring process, along with all otherpaperwork needed to set up a new employee

There are only minor downsides to this best practice With more employees

in the plan, there will be somewhat higher fees charged by the 401(k) serviceprovider (which are typically charged on a per-person basis) Also, there will still

be some paperwork associated with those employees who do make a negative

election Finally, since the group of employees who tend to be added to the401(k) plan through this method are at the lower end of the income stratum, it ismore likely that they will want to take out loans against their invested funds, each

of which calls for more paperwork

11–15 Grant Employees Immediate 401(k) Eligibility

The most common way to enroll employees into a company’s 401(k) pensionplan is to make them wait either 90 days or a year from the date of hire This calls

11–16 Grant Employees Immediate 401(k) Eligibility 255

for the maintenance of a list of dates for newly hired employees that must bewatched to ascertain when someone becomes available for this benefit Then theymust be contacted and scheduled for a short lecture about how the plan works andhow to invest in it Then they complete paperwork to enroll, which is forwarded

to the payroll department so that deductions can be made from their paychecksfor advancement to the 401(k) plan administrator All of the steps can more easily

be compressed into the hiring process, as was just noted in the “Automate 401(k)Plan Enrollment” section in this chapter However, the issue can be taken onestep further not only by completing all of the paperwork at the time of hire, but

also by actually allowing immediate participation in the plan at the time of hire.

This represents less a matter of improved efficiency than of giving new ees a fine new benefit, for they can begin investing funds at once, which may lead

employ-to a reduced level of employee turnover

The main problem is that new employees can impact a company’s ability topass pension plan nondiscrimination tests, especially if the new hires are at lowpay scales If these new employees do not invest a reasonable proportion of theirsalaries in the 401(k) plan, this can force highly compensated employees to limittheir plan contributions to less than the maximum amounts Nonetheless, if there

is a perception that immediate eligibility for the plan will improve the employeeturnover rate, then this should be considered the overriding issue

11–16 Consolidate Insurance Policies

Insurance policies are frequently added to a company’s insurance portfolio in apiecemeal manner Someone on the management team decides that some addi-tional coverage is needed to mitigate a perceived risk, and so an additional pol-icy is added—sometimes beginning at a different time of the year from the otherpolicies already in existence, and perhaps with different insurance companies.This can be an expensive approach, for each insurer must factor in potential losscosts plus operating expenses and profit—on each policy it issues

A better alternative is to aggregate the policies with a single insurer By doing

so, insurers can see that their administrative cost will be the same, despite themuch higher volume of insurance, and so they can reduce their insurance prices.Also, there is little risk that claims will arise on every single policy held, so theoverall risk to the insurer declines—which in turn can reduce prices yet again.This option is best used by large companies with large-dollar insurance poli-cies, since insurers will want their business badly enough to be willing to reduceprices based on the factors just noted

11–17 Obtain Key Man Life Insurance for the CFO

It is common for companies to take out key man life insurance policies on theirchief executive officers or the holders of key product knowledge—but what aboutthe CFO?

First, let’s look at the reasons for key-man insurance It is intended to at leastcover the cost of recruiting and training a replacement, and can also be used tofulfill any contractual pay or benefit obligations to the person’s surviving spouse.The most justifiable use of this insurance is when the partners in a partnershipneed the resources to buy out the shares of any partner who dies

These traditional reasons do not warrant the purchase of key-man insurancefor the CFO Companies should have a sufficiently deep management team to beable to promote a CFO from within, or at least adequately backfill the position until

an outsider is hired

However, there is a scenario when such insurance might make sense If thecurrent CFO is deeply involved in financing arrangements and there is a seriousrisk that the financing could be lost in the event of the CFO’s demise, then theinsurance proceeds could compensate for the lost funds If this scenario is thereason for having key-man life insurance, then the amount of the insurance shouldapproximate the amount of funding at risk of being lost

11–18 Obtain Advance Rating Assessments

A company with publicly held debt can never be sure about the change in its ing by a major rating service after it has taken some significant action, such as anacquisition or a major capital investment If the rating agency decides after thefact that the company’s action has downgraded the credit level on its debt, then thereduced ranking may trigger a number of adverse financial items—such as a drop

rat-in the market price of the debt rat-in order to rat-increase its effective rat-interest rate, ordifficulty in obtaining additional debt at a reasonable price

This problem can be overcome by using Standard & Poor’s Rating tion Service This service allows a company to obtain a confidential review of itscredit rating by a Standard & Poor’s analyst who will issue a prospective creditrating based on the proposed action This is a particularly valuable service when acompany has a range of action items to choose from and is willing to change itsstrategic direction based on which action results in the best credit rating Sincethe ratings derived by Standard & Poor’s are based on prospective actions thatmay never be implemented, the ratings will be kept confidential until such time asthe company makes its plans public Examples of possible activities that couldrequire a prospective credit analysis are asset sales or divestitures, stock buy-backs,

mergers or acquisitions, financial restructurings, recapitalizations, expansions intonew lines of business, and modifications to the corporate legal structure.

The primary difficulty with this best practice is the considerable fee required

to have these analyses performed The fee charged will increase for each tional strategic option a company wishes to have analyzed, so having a broadrange of possible actions reviewed will be expensive

11–19 Rent a Captive Insurance Company

Companies are having increasing difficulty obtaining reasonably priced insurance

of all types, if they can obtain insurance at all Captive insurance companies havebeen used to provide access to insurance They are run by a single company, anassociation of companies, or by an entire industry in order to solve particularinsurance problems Though the use of captive insurance companies has been alongstanding option for obtaining at least some of the necessary insurance, thisoption has required extensive legal analysis, incorporation costs, and significantinitial capitalization fees that have limited their use Also, sharing a captive withother companies has, until now, meant that a company must share in the risksincurred by other companies, which can present an uncomfortably high risk profile.Over the past few years, changes in the legal requirements for captive insur-ance companies have brought about the creation of the rent-a-captive Under thislegal structure, a captive insurance company has already been created by a thirdparty that rents it out for use by multiple companies The structure is usually inthe format of “protected cells,” whereby each company using one can shield itscontributed capital and surplus from other renters that are also using the captive.Not only does this format prevent a company from dealing with the initial start-upcosts of a captive insurance company, but it also allows it to retain any underwritingprofit and investment income from contributed funds The company can evenrecover a low-claim bonus at the end of the rent-a-captive contract, though it canalso be liable for additional claims payments that exceed its initial or subsequentcontributions into the captive This format is especially useful for those companiesfaced with moderate risks that have reduced their frequency of claim incurrence.Conversely, it is less useful for companies seeking catastrophic coverage or thathave high volumes of small-claim activity

The creators of rent-a-captive insurance companies usually charge a age fee of premiums paid into the captives in exchange for their use, while somealso take a share of the investment profit This option is cost-effective for thosecompanies paying at least half a million dollars in insurance expenses per year.One should also pay for up-front legal advice on both the applicability of thisapproach and the tax deductibility of contributions made into a rent-a-captive

11–20 Use Internet-Based Risk Measurement Services

Anyone who invests in various types of equity on behalf of a company may, fromtime to time, have a queasy feeling that there is some degree of risk associated withthose investments, but has no way of quantifying it without paying for the services

of a finance expert Also, it may be useful to report to senior management on themeasured risk of the current basket of investments, if only to provide a defense incase there is a drop in their value at some point in the future This valuable risk

analysis tool is now available through the Internet at www.riskgrades.com.

This on-line service grades the risk of any equity that the user enters into thesystem, reviewing its equity, interest rate, currency, and commodity risk Thisresults in a “RiskGrade” that is an indicator of risk based on the volatility ofreturns RiskGrades are determined by comparing the current estimated returnvolatility of an asset to the market-cap weighted average return volatility of a set

of equity markets during normal market conditions A RiskGrade of zero indicatesprice volatility of zero (as would be the case for pure cash holdings), with higherRiskGrade ratings indicating a higher degree of volatility These RiskGradescores can then be used to compare the risks of various assets or entire portfolios

11–21 Issue Catastrophe Bonds

A company may issue debt and then be unable to pay it back to creditors, due to theimpact of a natural disaster on its facilities A good way to reduce the impact of anatural disaster on debt repayment is the catastrophe bond More commonly known

as a cat bond, it is designed to raise money in the event of a major catastrophe,which is usually defined as an earthquake, hurricane, or windstorm If the issuersuffers a loss from a predefined catastrophe, then its obligation to repay the interest

or principal is either deferred or canceled Some cat bonds are indemnity based,which means that they pay out based on actual claims stemming from the catastro-phe; these bonds are considered more risky for bond purchasers, since a wide vari-ety of claims may be brought Another type of cat bond is based on parametric data,

so they pay out only if precise physical measurements of the actual event occur,such as wind speed or earthquake magnitude exceeding a threshold level

Large cat bonds are almost always issued by reinsurance companies, and aretypically rated as junk bonds The only recent exceptions have been the OrientalLand Company (Japanese earthquake), Vivendi Universal (California earthquake),and FIFA (terrorism during the 2006 World Cup) The most recent informationabout cat bond issuances and risk profiles by country is listed in the excellentWorld Catastrophe Reinsurance Market report, which is available for free from

Guy Carpenter at www.guycarp.com.

Cat bonds are also available in smaller sizes for individual corporations,though these are usually specially designed private placements to one or two

investors This approach to catastrophe coverage is especially useful when tional insurance coverage is too expensive, allowing issuers to essentially extractinsurance coverage from the securities market.

11–22 Centralize Foreign Exchange Management

A company that has multiple divisions conducting business with other countriesmay be spending too much money hedging its foreign exchange risk Each divi-sion will hedge its exposure without regard to the exchange positions of the otherdivisions, which may result in excess hedging costs The reason for the excess

costs is that one division may have a large account receivable that is payable in (for example) British pounds, while another division may have a payable in British

pounds Each one may pay to hedge the risk on pounds, when in reality, from theperspective of the entire company, the receivable and payable positions of the twodivisions offset each other Only the difference between the two positions needs

to be hedged, which is less expensive

Another problem is that there are intercompany payments between sidiaries located in different countries; these transactions should be netted to arrive

sub-at the minimum possible flow of foreign exchange

To take advantage of these offsetting positions, a company needs to ize its foreign exchange management in one place, so that a coordinated effort tonet out all exchange risks can be created This is not just a matter of moving all ofthe foreign exchange people from outlying locations into one building, but also(and much more importantly) a matter of channeling the flow of foreignexchange information from all divisions into a single location This may call forcustomized interfaces from each division’s accounting systems to the centraldatabase, or perhaps an extract of data from a centralized data warehouse (seeChapter 14) This function can also be outsourced to a bank that specializes inforeign exchange netting, such as CitiBank or Bank of America, though one shouldperiodically comparison-shop their foreign exchange rates to ensure that they arecompetitive It can even be manually stored in an electronic spreadsheet, thoughthis approach requires some attention to the transfer of all intercompany payablesand receivables to the person who is netting out the transactions; this involvessetting a timetable that specifies a monthly settlement date, and then works back-wards from that date to determine the deadlines by which all subsidiaries mustreport their payables and receivables Once this information is gathered, it mustthen be merged to determine a company’s net foreign exchange position at anygiven time Once this information is available, a company can achieve significantcost reductions in its hedging activities

central-There are two other factors favoring the use of centralized foreign exchangemanagement One is that the reduced amount of currency being shifted betweencorporate subsidiaries results in a smaller amount of cash float within the organi-

zation (though this can be eliminated entirely with the use of wire transfers instead

of checks) The other possibility is to use the netting of intercompany payables andreceivables to make leading or lagging payments, which are effectively short-termloans that may assist in dealing with short-term cash flow problems at certainsubsidiaries However, these changes in the timing of payments can take on theappearance of intercompany loans, so expert international tax advice should beobtained before trying such an activity

11–23 Settle Foreign Exchange Transactions with the Continuous

Link Settlement System

Foreign exchange settlement has been a prolonged affair in which there is icant risk of one party’s defaulting before a transaction has been completed Toavoid this risk while also speeding up the settlement process, a number of majorbanks banded together to create the Continuous Link Settlement (CLS) system,which is operated by CLS Bank (of which the founding banks are shareholders)

signif-In essence, member banks submit foreign exchange transactions to CLS Bank,which matches up both sides of each transaction during a five-hour period (whichrepresents the overlapping business hours of the participating settlement sys-tems) If the exact settlement criteria are not met for each side of the trade duringthis time period, then no funds are exchanged

How does CLS impact the corporation? It gives the cash manager exactinformation about the availability of funds in various currencies, which had pre-viously been difficult to predict with precision With foreign exchange informa-tion, they can now optimize their short-term investment strategies

Some of the better-known members of CLS Bank are Bank of America,CitiBank, Goldman Sachs, JPMorgan Chase, Mellon Bank, Morgan Stanley, andState Street Bank and Trust Other banks can submit their foreign exchange trans-actions through these member banks, so access to the CLS system is quite broad

11–24 Use Natural Hedging for Transaction Risks

When a company engages in transactions that involve another currency, it incurs atransaction risk that currency fluctuations will adversely impact its cash flows.They frequently purchase derivatives to hedge against these transaction risks How-ever, some organizations are reluctant to follow this path, because (1) derivativescan be expensive, and (2) FAS Statement 133 requires a company to charge fluctu-ations in the value of a derivative to the current reporting period if it cannot prove

11–24 Use Natural Hedging for Transaction Risks 261

that the derivative effectively hedges an exposure The latter issue also requires aconsiderable amount of documentation work.

To avoid the use of derivatives, some companies have centralized their sury operations, which gives the treasurer sufficient information about company-wide transaction flows to determine where transactions can offset each other.This information allows treasurers to create natural hedges, which require no FAS

trea-133 documentation and are free When using natural hedges, there will still besome residual exposure if revenues and costs do not exactly offset each other, butthe remaining exposure is greatly reduced

This technique is possible only if treasury operations are centralized, or if theinformation needed to construct natural hedges can be obtained by other means,such as through a data warehouse that accumulates information from multiplesources

11–25 Install a Treasury Workstation

The multitude of treasury-based transactions can take up a large part of the financestaff’s workday and is highly subject to error These tasks involve management of

a company’s cash position, investment and debt portfolio, and risk analysis Thenormal approach to these tasks is to track, summarize, and analyze them on anelectronic spreadsheet, with manual input derived from all of the company’s banksand investment firms on a daily basis In addition, any changes resulting from thisanalysis, such as the centralization or investment of cash, must be manually shifted

to the general ledger Given the highly manual nature of these tasks, this frequentlyresults in errors that must be corrected through the bank reconciliation process Atreasury workstation can greatly reduce many of these work steps

A treasury workstation is a combination of hardware and software that willmanage cash, investments, debt issuance and tracking, as well as provide somerisk analysis functions It is an expensive item to purchase, typically rangingfrom $30,000 for a bare-bones installation to $300,000 for a fully configured one.The difference between these prices is the amount of functionality and bankinterfaces added to the treasury workstation—if a buyer wants every possible fea-ture and must share data with a large number of financial suppliers, then the costwill be much closer to the top of the range Given these costs, this best practice isnot cost-effective for companies with sales volumes under $50 million Also,because of the large number of interfaces needed to connect the workstation toother entities, the installation time can range from one to nine months

Why spend so much money and installation time on a treasury workstation?Because it automates so much of the rote finance tasks For example, if an employeeenters an investment into the system, it will create a transaction for the settlement,one for the maturity, and another for the interest It will then alter the cash forecast

with this information, as well as create a wire transfer to send the money to aninvesting entity Here are some of the other functions that it can perform:

• Bank reconciliation It can do the bulk of a bank reconciliation, leaving just a

few nonreconciling items to be resolved by an employee

• Cash forecasting It can determine all company cash inflows and outflows

from multiple sources in order to derive a cash forecast

• Cash movement It can originate electronic funds transfers.

• Debt tracking It can follow short-term debt with a link to a dealer-based

commercial paper program

• Financial exposure It can identify and quantify financial exposure.

• Foreign exchange It can determine a company’s cash positions in any

currency

• Investment tracking It can track and summarize a company’s investment

positions in money markets, mutual funds, short-term and fixed-incomeinvestments, equities, and options

• Risk analysis It allows an employee to use it as a giant calculator,

perform-ing what-if analyses with yield-curve manipulation and scenario analysis.Based on this lengthy list, it is evident that a large company can derive a suf-ficient benefit from a treasury workstation to offset its substantial cost For moreinformation about treasury workstations, contact any of the following workstation

suppliers: SunGard Treasury Systems (www.sungard.com) and Thomson cial (www.selkirkfinancial.com).

11–26 Optimize the Organization of Treasury Operations

A large multinational company typically became large at least in part throughacquisitions, which leaves it with a complex set of banking relationships andaccounts, as well as a highly dispersed treasury management group that resides

in a multitude of locations This results in the inefficient use of cash, which inturn reduces interest income and does not allow a company to pay down the opti-mal amount of debt

These problems can be mitigated by implementing regional treasury ment centers, usually one per continent By doing so, the treasurer can concen-trate those treasury staff with the highest levels of expertise in the same locations,while also achieving a much higher level of control over the underlying cashpooling and foreign exchange transactions, not to mention better clerical tracking

manage-of any resulting intercompany loans By concentrating activities into this smaller

11–26 Optimize the Organization of Treasury Operations 263

number of regional treasury centers, the treasurer can also more easily obtain line access to the overall status of cash flows for the entire company.

on-The price of this increased level of efficiency is a considerable amount ofresistance by individual companies within the corporate conglomerate, since localcontrollers and chief financial officers will be reluctant to hand over the adminis-tration of their cash flows to a regional center that is outside of their control Also,such a high level of cash management calls for centralized information flows thatcan only be provided by a companywide enterprise resource planning (ERP) sys-tem, which is an extremely expensive system to purchase and install Consequently,the multinational optimization of treasury activities is so expensive that it is a rea-sonable option only for the largest companies

11–27 Process Foreign Exchange Transactions

over the Internet

Companies typically purchase or sell spot or forward contracts in foreign cies in order to hedge their transaction activities that involve other currencies.However, this is a labor-intensive process involving calls to several banks to seewhich ones quote the best price In many cases, the accounting staff simply doesnot have time to make a number of calls, and so chooses by default to deal withthe same bank every time, thereby sidestepping the chance to obtain lower prices

curren-on its foreign exchange transacticurren-ons In additicurren-on, the incidence of errors in ordersplaced by phone is high, due to communication or transcription problems.These problems can be avoided through the use of an Internet-based foreign

exchange transaction site, such as www.currenex.com or www.gaincapital.com.

These sophisticated trading sites allow one to request prices from multiple banksthat provide executable live quotes using a reverse auction method Under thisapproach, banks offering quotes know the identity of the trader, but do not knowwhich other banks are bidding This method results in the best price for a trader,and in addition yields great efficiency in the trading process, since there is no need

to waste time making multiple phone calls to banks to obtain a range of quotes.These on-line systems have other advantages, too For example, one candownload information about a completed trade into the corporate treasury man-agement system, as well as create audit reports detailing the results of each trans-action It is also possible to create reports that summarize trading patterns andtransaction reports with banks, as well as print or download trade ticket informa-tion There are also no transactional errors, since the Web site automaticallymatches and stores the financial and settlement details for each party to a foreignexchange transaction Also, most sites give traders access to research, analyticaltools, and current news reports Further, some sites offer customization of the inter-face, so that one can see only specific fields, create templates for repetitive trades,

and modify standard reports It is even possible to use instant messaging betweenboth parties to a transaction! In short, there is a wide array of advantages to theseexcellent sites that make them a clear improvement over other methods for com-pleting foreign exchange transactions.

11–27 Process Foreign Exchange Transactions over the Internet 265

Chapter 12 Financial Statements

Best Practices

This chapter covers the best practices that can be used to issue financial ments more rapidly This creation process can be one of the most convoluted andtime-consuming of all activities, with a long time needed to complete a qualityset of statements When a long interval is regularly required to complete financialstatements, it has two significant impacts: not allowing any time for the account-ing staff to complete other activities, and an irate management team that neverreceives its information on time These are serious problems that can be completelyeliminated by the best practices noted in this chapter

state-The primary purpose of the more than two dozen improvement suggestions

in this chapter is to streamline the entire process of financial statement production.This is done in a variety of ways, such as completing some tasks before the end

of the month, avoiding the bank reconciliation, and automating the month-endcutoff process Most of these steps are simple ones and can be quickly and easilyinserted into the existing process A few, however, such as automating the period-end cutoff, require a significant amount of extra work and may carry some risk ofproviding imperfect financial information Consequently, it is necessary to revieweach recommended best practice carefully and only use those that will most eas-ily be inserted into the existing system without causing either a stoppage in finan-cial statement production or a reduction in their quality

This chapter begins with a brief analysis of the level of implementation culty for each of the best practices, proceeds to a detailed review of each one, andfinishes with an overview of how most of them can be grouped together into ahighly efficient financial statement production process

diffi-Implementation Issues for Financial Statements Best Practices

This section notes the relative level of implementation difficulty for all of the bestpractices that are discussed later in this chapter The primary source of information

is contained in Exhibit 12.1, which shows the cost and duration of implementationfor each best practice For this group of improvements, the table makes it clearthat, in most cases, changes are of little duration, easy to implement, and have little

or no cost The reason is that most alterations are confined to a small number of

266

Implementation Issues for Financial Statements Best Practices 267

Exhibit 12.1 Summary of Financial Statements Best Practices

Financial Reports

12–1 Move operating data to other reports

12–2 Post financial statements in an Excel

PivotTable on the Internet 12–3 Restrict the level of reporting

12–4 Write financial statement footnotes

in advance 12–5 Create a disclosure committee

Work Automation

12–6 Automate recurring journal entries

12–7 Automate the cutoff

Work Elimination

12–8 Avoid the bank reconciliation

12–9 Defer routine work

12–10 Eliminate multiple approvals

12–11 Eliminate small accruals

12–12 Reduce investigation levels

Work Management

12–13 Assign closing responsibilities

12–14 Compress billing activities

12–15 Conduct transaction training

12–16 Continually review wait times

12–17 Convert serial activities to parallel ones

12–18 Create a closing schedule

12–19 Document the process

12–20 Restrict the use of journal entries

12–21 Train the staff in closing procedures

12–22 Use cycle counting to avoid

month-end counts 12–23 Use internal audits to locate transaction

problems in advance

(continues)

people within the accounting department, which makes it easier to alter the tasks

of just that small group Also, these are mostly procedural changes, ones that donot require expensive and problematic computer programming alterations Fur-ther, there is little need for the participation of other departments Thus, for allthese reasons, the risk and investment associated with most of these best practicesare low

The two glaring exceptions are automating the period-end cutoff and usinginventory cycle counting to avoid month-end inventory counts In the first case,there is a need for programming; and in both cases, the complete cooperation ofthe warehouse staff is required Given these two additional variables, these bestpractices become not only the most expensive and time-consuming ones to imple-ment, but also the ones most likely to fail

12–1 Move Operating Data to Other Reports

A major factor in the delay in completing financial statements is the inclusion ofoperating data in the statements The reason is that this information, such as scraprates or employee turnover, is not contained in the financial information that theaccounting staff normally deals with, nor is it readily obtained by creating ratios orcomparisons of the financial data In short, this information can be hard to obtain.The situation is worsened by the lack of control of the accounting staff over whotracks the information, as well as its accuracy once it is obtained For example, asubsidiary may forward information about its customer backlog that seems suspi-ciously high; the controller has the options of including the provided data in thefinancial statements or of holding off on the financial statement distribution whilerequesting and waiting for a review of the numbers by the subsidiary—which isunder no obligation to do the review Thus, including operating data in the finan-cial statements not only can delay the issuance of the statements, but also doesnothing to ensure the accuracy of the operating information

An easy way to avoid these problems is to separate all operating informationfrom the financial statements so the statements can be issued in a timely manner,

Exhibit 12.1 (Continued)

Work Timing

12–24 Use standard journal entry forms

12–25 Complete allocation bases in advance

12–26 Conduct daily review of the financial

statements

with the operating information sent out later in a separate document By using thisapproach, there are fewer steps to complete when issuing financial statements,leaving fewer steps to delay the overall process Also, if there are problems with theoperating data, the controller can review the information at his or her leisure andverify that the information is correct before releasing it Not only is this an easybest practice to implement, but it is also one that has no associated expense.

12–2 Post Financial Statements in an Excel PivotTable

on the Internet

A number of companies have found that an effective way to increase investorknowledge of their activities is to post their financial statements on their Web sites.These tend to be a summary-level duplication of the most recent quarterly orannual results, as well as any accompanying financial notes Though this is cer-tainly a good way to communicate with investors, the concept can be taken a stepfurther by loading the financial information into an Excel PivotTable, which isessentially a three-dimensional spreadsheet that reveals different layers of infor-mation to the user By using a PivotTable, a reader of a financial statement canaccess the results for multiple years, or even different lines of business, within asummary-level financial statement A good example of this layout can be found inthe Investor Relations section of the Microsoft Web site This is a relatively easybest practice to implement The only downside is that investors must downloadthe file, which creates the highly unlikely, yet possible, risk of importing a com-puter virus through the spreadsheet file

12–3 Restrict the Level of Reporting

Over time, many older companies have gradually gotten into the habit of ing (and receiving) immensely detailed financial statements from the accountingdepartment Besides the usual balance sheet and income statement, as well asdepartmental reports, there can be a plethora of additional schedules, such assales by customer or region, inventory levels by type of inventory, and a completeactivity-based costing analysis of every customer Though some of these reportsmay be set up to run automatically as part of the regular package of financialstatements (and thereby requiring no additional work), other reports may requirethe transfer of information to a different format, such as an electronic spread-sheet, for further analysis and regrouping into a customized report In this case,the amount of time required to assemble and independently prepare the reportsmay exceed the time needed to create the primary financial statements Thus, the

more reports included in the financial statements, the more time it takes to issuethe statements.

The solution is to make a list of all the reports included in the financialstatements, ignore those that are automatically created by the accounting software,and focus on eliminating or delaying those that are created separately It may bepossible to strip these reports out of the basic financial reporting package, allowingthe accounting staff to issue the basic underlying statements much more quickly

To achieve this goal, it may be necessary to explain to management that the reportswill no longer be provided at all (which is normally not received well) Othervariations are to issue the reports separately and at a later date, or to issue themless frequently, such as once a quarter or year Usually, there is some combination

of methods that will be agreeable to management, thereby allowing a controller

to restrict the level of reporting in the financial statements to only the most basicinformation

Management may take a better view of this reduction in the information vided if the controller or CFO makes it known that, while information will bedelayed, other information will be provided more frequently in order to meet theoperating needs of the company For example, the accounting department couldpromise daily access to information about changes in revenues, discounts given tocustomers, and expenses, and weekly access to changes in headcount information

pro-By providing this information so rapidly, it reduces the negative impact of ing some information from the financial statements, while also providing a service

restrict-by issuing key information even sooner than it had previously been issued

12–4 Write Financial Statement Footnotes in Advance

There are many footnotes that accompany a well-documented set of financial ments These typically include an executive summary, notes on the accountingmethodologies, the amount of long-term debt (as well as the years in which itcomes due), a commentary on insurance coverage, any customers with a high pre-ponderance of a company’s sales, and a historical comparison of the current results

to prior years Depending on the number of footnotes added to the financial ment package, this can be a considerable amount of work to update every period.The solution is to separate them into two categories: boilerplate informationthat is rarely changed, and information that is closely linked to current financialresults, requiring a great deal of updating All footnotes in the first categoryshould be clustered together to the greatest extent possible, reviewed prior to theend of the month, and even printed out and ready for inclusion with the remain-der of the financial statements By handling these items well in advance, there isless work to be done during the crucial period immediately following the end of areporting period, when there is little time available for such work Unfortunately,