Controllership the work OF the managerial accountant seventh edition by janice m roehl anderson and steven m bragg

He has written the fol-lowing books: Accounting and Finance for Your Small Business Wiley Accounting Best Practices, 3rd Edition Wiley Accounting Reference Desktop Wiley Advanced Account

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JANICE M ROEHL-ANDERSON STEVEN M BRAGG

John Wiley & Sons, Inc.

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JANICE M ROEHL-ANDERSON STEVEN M BRAGG

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ABOUT THE AUTHORS

Janice M Roehl-Anderson, MBA, is a principal with Deloitte, with over 20 years of

consult-ing experience She specializes in information systems security; financial and cost accountconsult-ingsystem analysis, design, selection, and implementation; long-range information systems plan-ning; and information management reviews/audits She has also worked for US West In addi-tion to earning her BA in Business at the University of Washington, and MBA in Accountingand Information Systems at the University of Southern California, Jan has successfully com-

pleted the CPA exam, and has co-authored over 10 books, including The Controller’s Function: The Work of the Managerial Accountant.

Steven Bragg, CPA, CMA, CIA, CPIM, has been the chief financial officer or controller of

four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte Hereceived a master’s degree in finance from Bentley College, an MBA from Babson College, and

a Bachelor’s degree in Economics from the University of Maine He has been the two-timePresident of the 10,000-member Colorado Mountain Club, and is an avid alpine skier, moun-tain biker, and rescue diver Mr Bragg resides in Centennial, Colorado He has written the fol-lowing books:

Accounting and Finance for Your Small Business (Wiley)

Accounting Best Practices, 3rd Edition (Wiley)

Accounting Reference Desktop (Wiley)

Advanced Accounting Systems (Institute of Internal Auditors)

Business Ratios and Formulas: A Comprehensive Guide (Wiley)

Cost Accounting: A Comprehensive Guide (Wiley)

Design and Maintenance of Accounting Manuals: A Blueprint for Running an Effective and Efficient Department, 4th Edition (Wiley)

Essentials of Payroll: Management and Accounting (Wiley)

Financial Analysis: A Controller’s Guide (Wiley)

Just-in-Time Accounting: How to Decrease Costs and Increase Efficiency, Second Edition

(Wiley)

Managing Explosive Corporate Growth (Wiley)

Outsourcing: A Guide to Selecting the Correct Business Unit Negotiating the tract Maintaining Control of the Process (Wiley)

Con-Sales and Operations for Your Small Business (Wiley)

The Controller's Function: The Work of the Managerial Accountant, 2nd Edition (co-authored

with Janice M Roehl-Anderson, Wiley)

The New CFO Financial Leadership Manual (Wiley)

ACKNOWLEDGMENTS

With the rapidly changing business environment, it was essential that the material contained in thisvolume be accurate, up-to-date, and relevant Accordingly, in addition to the chapters written orrevised by the two co-authors, these contributing authors, listed alphabetically, wrote or revised thechapters indicated:

Alan R Arnold, Manager

Ernst & Young LLP, Irvine, California

Chapter 42, Systems Performance Management

Karen L Bassett, Manager

Ernst & Young LLP, Denver, Colorado

Chapter 39, Software Testing

E Edward Bassett III, Senior Systems Security Engineer

Denver Technological Laboratories

Chapter 43, Information Security SystemsChapter 46, Digital Signatures

Kevin Church, Senior Manager

Deloitte, San Francisco, California

Chapter 51, Organizations Embrace Shared Services—Big and Small

David Drach, Director of Business Analytics

FRx Software Corporation, Denver, Colorado

Chapter 44, Enforcing Information Security Policy

Pak Fong, Senior Manager

Deloitte, San Francisco, California

Chapter 50, How to Implement a Successful CRM Solution

Marty Gold, Senior Manager

Ernst & Young LLP, Denver, Colorado

Chapter 61, Tax Records and Procedures

Susan Hogan, Principal

Deloitte, Atlanta, Georgia

Chapter 51, Organizations Embrace Shared Services—Big and Small

Sara J Moulton-Reger, e-Business Strategy Consultant

IBM Global Services, Denver, Colorado

Chapter 47, Change ManagementChapter 48, Project Risk ManagementChapter 49, Effective Project Communications

Jill M Weisbrod, Manager

Ernst & Young LLP, Denver, Colorado

Chapter 39, Software Testing

Tanya Whiteing, Senior Manager

Deloitte, Foster City, California

Chapter 38, Testing Strategies for Financial Systems

PREFACE

Since the first publication of this book in 1952, the role of the controller has greatly expanded Ithas moved from that of a simple technician who must properly process transactions to a businessexecutive with a wide-ranging knowledge of total business operations, best practices, and corpo-

rate strategy To address these changes, Controllership has evolved into a comprehensive guide to

accounting management, planning, computer systems, and administration—in short, a repositoryfor all the skills that a modern controller needs While the sixth edition addressed such key issues

as the fast close, best practices, information security systems, outsourcing the accounting function,and software testing, we felt it necessary to issue a new edition that addresses a wide range of addi-tional topics that have become more important in the last four years The following new items areaddressed in depth:

• Logic steps for ethics-related decisions

• Summaries of essential GAAP pronouncements

• Cost accounting systems and methodologies

• Throughput costing

• Composition and role of the audit committee

• Taxation strategy

• Business cycle forecasting

• Payroll compensation and tax issues

• Management reporting formats

• Reporting to the Securities and Exchange Commission

• Acquisition due diligence checklists

• Accounting manual preparation and maintenance

These new topics address many of the concerns of the modern controller: what information toexamine during an acquisition due diligence review, how to integrate throughput costing decisionsinto the financial analysis toolbox, and how to alter accounting systems to take advantage of taxa-tion strategies

We have attempted to include in this volume practical commentary on the various aspects ofcontrollership Given the growth in complexity and the rapid changes taking place in the manyfunctions of accounting, we have secured assistance from a number of knowledgeable practitionersand writers in the relevant fields of endeavor These contributing authors are identified in theAcknowledgments section

In short, the seventh edition of Controllership is the complete business advisor for today’s

Because of the rapidly changing nature of information in this field, this product may be updated with annual

supplements or with future editions Please call 1-877-762-2974 or email us at subscriber@wiley.com to

receive any current update at no additional charge We will send on approval any future supplements or neweditions when they become available If you purchased this product directly from John Wiley & Sons, Inc., we

CONTENTS

1 Accounting in the Corporation 3

Tasks of the Accounting Function 3Role of the Accounting Function 5Role of the Controller 6

Impact of Ethics on the Accounting Role 7Evolving Role of Accounting 9

2 Controller’s Responsibilities 11

Variations on the Title 11Planning Function 12Control Function 12Reporting Function 13Accounting Function 13Additional Controller Functions in Smaller Companies 14Controller’s Job Description 16

Relationship of the Controller to the Chief Financial Officer 18Future Changes in the Controller’s Origins and Responsibilities 19Managing Explosive Growth 20

3 Chief Financial Officer: From Controller to Facilitator of Change 23

Understanding What Chief Executive Officers Want 23Task of the CFO 24

Develop and Communicate a Compelling Finance Agenda 24Build a Commitment to Change within Finance 26

Change Executive Management Practices 29Enlist the Support of the Chief Executive Officer 30Mobilize the Organization 31

Institutionalize Continuous Improvement 32

4 Accounting Principles and Standards 35

Committee on Accounting Procedure 35Accounting Principles Board 36Financial Accounting Foundation 36Financial Accounting Standards Board 36Government Accounting Standards Board 37International Accounting Standards Board 38Accounting Standards 38

Accounting Research Bulletins 39Opinions: Accounting Principles Board 39Interpretations: FASB 41

Statements of Financial Accounting Standards: FASB 44Statements of Financial Accounting Concepts: FASB 53Technical Bulletins: FASB 54

5 Cost Accounting and Costing Systems 57

Purpose of Cost Accounting Information 57Input: Data Collection Systems 58

Processing: Data Summarization Systems 60Processing: Job Costing 62

Processing: Process Costing 66Processing: Standard Costing 69Processing: Direct Costing 71Processing: Throughput Costing 73Processing: Activity-Based Costing 76Processing: Target Costing 79Outputs: Cost Variances 80

6 Ratio and Trend Analysis 85

How to Use Ratios and Trends 85

A Caveat 86Measures for Profitability 88Measures for the Balance Sheet 90Measures for Growth 94

Measures for Cash Flow 96Measures for Nonfinancial Performance 97Interrelationship of Ratios 110

Setting Up a System of Ratios and Trend Analyses 110

7 Internal Control Systems 115

Objectives 115Responsibility for Internal Controls 116Examples of Internal Controls 117When to Eliminate Controls 119

T ypes of Fraud 121Preventing Fraud 122How to Deal with a Fraud Situation 125Foreign Corrupt Practices Act 126

8 Internal Audit Function 129

Reporting Relationships 129Composition of the Audit Committee 130Role of the Audit Committee 131Internal Audit Objectives 132Internal Audit Activities 134Managing the Internal Audit Function 136

9 Globalization: Complexities and Opportunities 139

Changing Nature of International Trade 140

Contents xi

Impact of Global Trade on Segments of the U.S Economy 140Determining and Implementing Successful Global Strategies 142Organization Structure in a Global Enterprise 143

Virtual Corporation 145Technical Aspects of the Controllership Function under Globalization 146

10 Recruiting, Training, and Supervision 159

Recruiting Sources 159Factors to Consider when Recruiting 162Factors to Consider When Promoting 163Importance of Reduced Turnover 164Importance of Developing Career Plans for Employees 167Importance of Communications with Employees 169How to Motivate Employees 171

11 Controller’s Role in Investor Relations 173

Objectives of the Investor Relations Function 174Evolving Nature of the Function 174

Communication Vehicles for Investor Relations 174Investor Relations Message Recipients 175Information Needs of the Financial Analyst 176Information Needs of Other Groups 178Disclosure Policy 178

Organization Structure for Investor Relations 179Role of the Controller and Other Principals 180Changes in the Capital Markets 182

12 Business Plans and Planning: Interrelationship of Plans, Strategic Planning 187

Business Planning Defined 188Framework for Business Planning 188Time as Related to Planning 188Planning Period: How Long Is “Long Range”? 189System of Plans 190

Strategic Plan: An Overview 190Corporate Development Plan 191Operations Plan 191

Basic Elements in Any Plan 191Planning Process 192

Plan Frequency 194Plan Guidelines 194Who Should Do the Planning? 195Supplemental Planning: Alternative Scenarios 196Planning Timetable or Schedule 196

Strategic Planning: An In-Depth Review 196Environmental Analysis 198

Critical Success Factors 199Business Mission or Purpose 200Long-Range Business Planning Objectives 202

Developing Strategies 205Strategies and the Planning Period 208Role of the Controller 208

Improving the Strategic Planning Process 210

13 Financial Impact of the Strategic Plan: Long-Range Financial Plan 211

Key Elements Of A Strategic Plan 211Contrast Of Strategic Plan (Financial Aspects) with the Annual Plan 212Capital Investments 213

Risk Analysis 214Key Relationships 215Objectives of the Long-Range Financial Plan 215Consolidation and Testing Process 216

Representative Financial Content of a Long-Range Plan 216Illustrative Financial Exhibits in the Plan Presentation 217Role of the Controller 230

14 Profit Planning: Annual Plan 233

Profit Planning Defined 233Purpose of Budgeting 234Planning Benefits 234Coordination Benefits 235Control Benefits 236Annual Planning Cycle : Illustrative 237Supportive Financial Statements and Budgets 238Sales Budget 239

Production Budget 240Purchases Budget 240Direct Labor Budget 241Manufacturing Expense Budget 241Inventory Budget 241

Operating Expense Budget 243Capital Expenditures Budget 243Cost of Goods Sold 243Statement of Estimated Income and Expense 243Cash Budget 245

Statement of Estimated Financial Condition 245Approval of Budget 246

Control Function 247Controller’s Role : A Key Player 247Management Approval of the Plan 253

15 Profit Planning: Supporting Financial Analysis for the Annual Plan 255

Basic Approach in Profit Planning 255General Comments on the Cost–Volume–Profit Relationship 256Break-Even Chart 256

Changes in Sales Revenue 258Changes in Sales Mixture 259Changes in Sales Price 260Changes in Costs 261Marginal Income Ratio and Margin of Safety 262

Contents xiii

Analysis by Product 262Application of Cost–Volume – Profit Analysis 263Selecting the Most Profitable Products 265Minimum Selling Price 266

Unit Costs at Different Volume Levels 266Increased Sales Volume to Offset Reduced Selling Prices 266Most Profitable Use of Scarce Materials 267

Advisability of Plant Expansion 267Break-Even Analysis to Evaluate a Forecast 269Workable Statement of Income and Expense 271Some Practical Generalizations 272

Statistical Techniques for Planning 272Program Evaluation Using Discounted Cash Flow 277Financial Analysis of Unacceptable Operating Results 277More Sophisticated Analyses 294

16 Taxation Strategy 295

Accumulated Earnings Tax 296Cash Method of Accounting 297Inventory Valuation 297Mergers and Acquisitions 297Net Operating Loss Carryforwards 298Nexus 299

Passive Activity Losses 300Project Costing 300Property Taxes 301

S Corporation 301Sales and Use Taxes 302Transfer Pricing 303Unemployment Taxes 305

17 General Discussion of Accounting/Statistical Standards: Benchmarking 309

Meaning of Accounting/Statistical Control 309Extent of Accounting/Statistical Control 310Need for Standards 310

Definition of Standards 311Advantages of Standards 312Relationship of Entity Goals to Performance Standards 313Types of Standards Needed 314

Trend to More Comprehensive Performance Measures 318Benchmarking 320

Balanced System of Performance Measures 321Setting the Standards 322

Use of Standards for Control 323Procedure for Revising Standards 326Recording Standards 327

Application of Standard Costs 328Management Use of Standard Costs 328

18 Planning and Control of Sales 329

Sales Management Concerns 330Controller’s Assistive Role in Sales Management Problems 331Controller’s Independent Role in the Planning and Control of Sales 333Control of Sales 334

Sales Analysis 334Sales Planning: Basis of All Business Plans 338Steps in Developing the Near-Term Sales Plan/Budget 339Control Phase 341

Methods of Determining the Sales Level 341Useful Sources of Forecasting Information 344Forecasting the Business Cycle 345

Sales Standards 350Sales Reports 354Product Pricing : Policy and Procedure 355

19 Planning and Control of Marketing Expenses 371

Definition 371Significance 372Factors Increasing the Difficulty of Cost Control 372Sales Manager and Marketing Expenses 373Basic Approach in the Planning and Control of Marketing Expenses 373Marketing Expense Analysis 373

Types of Analyses 374Planning Marketing Expenses 386Special Comments on Advertising and Sales Promotion Expense 392Control of Marketing Expenses 397

Marketing Expense Standards 397

20 Planning and Control of Manufacturing Costs: Direct Material

General Aspects of Manufacturing 403Direct Material Costs: Planning and Control 408Labor Costs: Planning and Control 416

21 Planning and Control of Manufacturing Costs: Manufacturing Expenses 425

Nature of Manufacturing Expenses 425Responsibility for Planning and Control of Manufacturing Expenses 426Approach in Control of Manufacturing Expenses 427

Proper Departmentalization of Expenses 427Variations in Cost Based on Fixed and Variable Costs 428Variations in Cost Based on Direct Labor 429

Variations in Cost Based on Batch Size 431Variations in Cost Based on Overhead 433Variations in Cost Based on Time 435Cost Estimation Methods 436Normal Activity 439Allocation of Indirect Production Costs 440Budgetary Planning and Control of Manufacturing Expenses 442

Role of the Controller 454Reports for Manufacturing Executives 455

22 Planning and Control of Research and Development Expenses 463

Research and Development Activities 463Impact of R&D Activities on Corporate Earnings 464R&D Activities in Relation to Corporate Objectives 464Integration of R&D with Other Functions 465

Organization for the R&D Financial Functions 466Accounting Treatment of R&D in Financial Statements 466Elements of R&D Costs 468

Role of the Financial Executive in R&D 469General Budgetary Procedure 470

Determining the Total R&D Budget 470Information Sources on R&D Spending 471Establishing the R&D Operating Budgets 472Detailed Budgeting Procedure 476

Other Control Methods 477Effectiveness of R&D Effort 481

23 Financial Planning and Control in a Service Company 487

Organizational Considerations 488Data Classification 489

Cost of Services; Activity-Based Costing 490Cost Accounting in a Service Organization 490Planning System 492

Strategic Planning 498

24 Planning and Control of General and Administrative Expenses 499

Components of G&A Expense 499Control over G&A Expenses 500Reducing G&A Expenses 505Budgeting G&A Expenses 509

Compensation 513Federal Income Taxes 515Social Security Taxes 517Medicare Tax 517State Income Taxes 518Payroll Taxes for Employees Working Abroad 518Remitting Federal Taxes 519

Payroll Deductions for Child Support 520Payroll Deductions for Unpaid Taxes 520Unemployment Insurance 521

PART 4 PLANNING AND CONTROL OF THE BALANCE SHEET 527

26 Planning and Control of Cash and Short-Term Investments 529

Objectives of Cash Planning and Control 530Duties of the Controller Versus the Treasurer 530The Cash Forecast 530

Cash Collections 542Cash Disbursements 546Internal Control 547Reports on Cash 550Cash Flow Ratio Analysis 553Impact of New Information Technology and Organizational Structures 554Investment of Short-Term Funds 555

27 Planning and Control of Receivables 559

Granting Credit to Customers 559Customer Margin Analysis 561Collections Task 562

Measurement of Accounts Receivable 564Control over Accounts Receivable 566Budgeting for Accounts Receivable Balances 568

28 Planning and Control of Inventories 571

Costs and Benefits of Carrying Inventory 571Role of the Controller 573

Material Requirements Planning Systems 575JIT Manufacturing Systems 576

Inventory Reordering Systems 580Obsolete Inventory 581

Reducing Inventory 583Inventory Cutoff 584Budgeting for Raw Materials 585Budgeting for Work-In-Process 590Budgeting for Finished Goods 591

29 Valuation of Inventories 595

Significance of Proper Inventory Valuation 595Controller’s Responsibility for Inventory Valuation 596Emphasis on the Cost Basis 596

Inventory Characteristics and Effect of the Valuation Base 597Selection of the Cost Base 598

Departure from the Cost Base 599Consistency in Valuation 600Federal Income Tax Considerations in Valuing Inventories 600Interim Statements 601

Other Inventory Valuation Problems 601Inventory Reserves 602

30 Accounting and Reporting for Selected Investments

Improving the Investment Decision Process 604

31 Planning and Control of Plant and Equipment or Capital Assets 623

Impact of Capital Expenditures 623Controller’s Responsibility 624Capital Budgeting Process 625Establishing the Limit of the Capital Budget 626Information Supporting Capital Expenditure Proposals 627Methods of Evaluating Projects 628

Payback Method 629Operators’ Method 630Accountants’ Method 630Discounted Cash Flow Methods 632Hurdle Rates 636

Cost of Capital—A Hurdle Rate 637Inflation 638

Foreign Investments 638Impact of the New Manufacturing Environment 639Impact of Activity-Based Costing 639

Classifying and Ranking Proposed Capital Projects 639Board of Directors’ Approval 641

Project Authorization 645Accounting Control of the Project 648Postproject Appraisals or Audits 648Other Aspects of Capital Expenditures 649

32 Management of Liabilities 659

Liabilities Defined 659Objectives of Liability Management 660Direct Liabilities 660

Illustrative Provisions of Credit Agreements 662Planning the Current Liabilities 666

Standards to Measure and Control Current Liabilities 667Corrective Action 668

Risks of Too Much Debt 668Some Benefits from Debt Incurrence 669Sources of Information on Debt Capacity 669Standards for Debt Capacity 669

Bond Ratings 670Leverage 671Contingencies 671Long-Range Financial Plan 672Managing Liabilities: Some Practical Steps 672Accounting Reports on Liabilities 673

Internal Controls 674

33 Management of Shareholders’ Equity 685

Importance of Shareholders’ Equity 686Role of the Controller 686

Growth of Equity as a Source of Capital 687Return on Equity as Related to Growth in Earnings Per Share 687Growth in Earnings Per Share 688

Cost of Capital 688Components of Cost of Capital 690Calculating the Cost of Debt 691Calculating the Cost of Equity 692Calculating the Weighted Cost of Capital 694Dividend Policy 695

Long-Term Debt Ratios 697Other Transactions Affecting Shareholders’ Equity 698Long-Term Equity Planning 698

Short-Term Plan for Shareholders’ Equity 704Other Considerations 704

34 Internal Management Reports 711

Rules of Reporting 711Status Reports 714Margin Reports 714Cash Reports 719Capacity Reports 728Sales and Expense Reports 730Payroll Reports 730

Graphical Report Layouts 737

Standardization in Annual Reports 758Other Reports to Shareholders 758Information for Security Analysts and Investment Advisors 759

36 Securities and Exchange Commission 761

Securities Act of 1933 762Securities Exchange Act of 1934 762Public Utility Holding Company Act of 1935 763Trust Indenture Act of 1939 763

Investment Company Act of 1940 764Investment Advisors Act of 1940 764Regulation S-X 764

Regulation S-K 767Regulation S-B 768Regulation FD 768SEC Forms 769EDGAR Filing System 773Going Private Transaction 775

Contents xix

37 Selecting a Financial Information System 779

Reasons to Purchase Software 780Ways to Define Systems Requirements 780Existing System Documentation 782Joint Sessions 783

Preparing the Request For Proposal 785Distribution of the RFP 786

Review of the Vendor’s Completed Proposal 788Reference Calls 792

Demonstration 792Site Visits 793Cost of the System 793Final Selection 794Contract Negotiations 794Appendix: Vendor Evaluation Criteria 794

38 Testing Strategies for Financial Systems 797

Testing Duration 797Use of Real Versus Mock Testing Data 798Test Scenarios 798

Security Testing 799Volume Testing 799Issue Tracking and Resolution 799Sign-Off Criteria 799

Testing Participants 800

39 Software Testing 801

Testing Considerations 801Testing Packaged Financial Systems 802Test Strategy 803

40 IT Support Models for Finance Organizations 815

Inadequately Trained End Users 815Need for Mixed Skill Sets 816Geographic Challenges 816Month-End Close Support 816Staff Retention 816

Complicated Systems Architecture 817Lack of an Established Escalation Process 817Lack of Documentation 818

Changing Management Reporting Requirements 818

41 How Much Is Too Much? Asset Ledger Detail in ERP 819

ERP Systems 819Integration of the ERP and EAM Systems 820Grouping Approach 821

42 Systems Performance Management 823

Define Your Organization’s Performance Methodology 824Six Essential Steps: A Performance Methodology 825

Performance Details 827Flow of Performance Information within the Organization 828

43 Information Security Systems 831

Types of Security Threats 832Basic Security Principles 833Components of an Effective Security Program 834Enterprise Security Strategies 840

Controller’s Role in Information Security 841

44 Enforcing Information System Security Policy 843

Creating an Enforceable Information System Policy 844Implementing Information System Security Policy 845After an Information System Security Infraction Occurs 846

45 e-Commerce Security 851

e-Commerce Architectures 851Critical Security Measures 854

46 Digital Signatures 861

Digital Signature Technology Overview 862Demand for Digital Signature Technology 866Legal Issues 867

47 Change Management 869

Defining the Change Management Challenge 870

48 Project Risk Management 879

Project Risk Categories 880Project Risk Management Approach 881

49 Effective Project Communications 887

Communication Program Overview 888Communication Strategy 888

Communication Campaign Definition 891Communication Plan 895

50 How to Implement a Successful CRM Solution 899

Define a Business Case to Drive Shareholder Value 900Clearly Communicate the Change Imperative 900Building a Winning T eam 901

Prepare for the Worst 902

51 Organizations Large and Small Embrace Shared Services 903

Executive Summary 904About the Survey 904Business Case 905Implementation 906Operations 908Customer Relations 908Next Steps 911

Contents xxi

PART 7 SOME ADMINISTRATIVE AND SPECIAL ASPECTS

52 Financial Planning and Analysis for Acquisitions,

History of Acquisitions and Mergers 916Relation of Acquisitions to Corporate Objectives 916Reasons for Divestments 917

An Overview of the Acquisition Cycle 917Acquisition Criteria 919

Sources of Acquisition Information 920Acquisition Team 921

Evaluating the Prospect: In-Depth Analysis 922Objectives of Financial Analysis 928

Impact of Differing Accounting Policies 929Valuation of an Acquisition 929

Comparing the Values 938Multinational Business Valuation 939Leveraged Buyouts (LBOs) 941Accounting for a Business Combination: Purchase Method 943Tax Considerations in Acquisitions and Mergers 947

Financial Impact of an Acquisition 949Financial Report on a Potential Acquisition 950Mistakes by Management 962

Effective Integration 964Divestments 965

53 Advanced Accounting Systems 967

Process Centering 967Partnering 969Internet 973ISO 9000 976Paperless Office 977Electronic Cash 980Virtual Corporation 982Data Warehousing 984

54 World-Class Accounting Systems 985

Overview 985Manufacturing Resource Planning 985Integrated Distribution Management 988Just-In-Time 993

Product Design 997Computer-Integrated Manufacturing 1001

55 Accounting Best Practices 1005

Sixty-Six Best Practices 1005

56 Reporting Period and How to Close It 1021

Selecting the Fiscal Year 1021Selecting the Number of Interim Reporting Periods 1022

Reasons for Accelerating the Closing Period 1024Value of Interim Reports 1024

How to Achieve a Fast Close 1025Typical Fast Closing Schedule 1029Reconciling Accurate Reporting against a Fast Close 1033

57 Outsourcing the Accounting Function 1035

Finding a Supplier 1035General Advantages of Outsourcing 1037Function-Specific Advantages of Outsourcing 1039Risks of Outsourcing 1040

Contractual Issues 1042Outsourcing Costs 1044Personnel Issues Related to Outsourcing 1046Management of Outsourcing Suppliers 1047

58 Preparation and Maintenance of Manuals 1053

Work Steps for Constructing a Procedures Manual 1054Suggested List of Procedures 1057

Maintaining Accounting Manuals 1059Responsibility for Maintenance of Manuals 1060Specifications for Maintenance of Manuals 1060Physical Construction of the Manual’s Binder 1061Creation and Storage of the Master Manual Copy 1062Creation and Maintenance of the Distribution Mailing List 1063Physical Distribution Process 1064

Issuances to New Employees 1065Manual Retrieval 1066

Benefits of Using Electronic Manuals 1066Disadvantages of Using Electronic Manuals 1068Basic Electronic Manual 1069

Electronic Manual with Embedded Hypertext 1069Electronic Manual with Advanced Indexing Features 1072Electronic Manual with Built-In Help Information 1073Writing Tips for Electronic Manuals 1074

Example of Comprehensive Electronic Manual Features 1075Using the PDF Format for Electronic Files 1076

Maintaining an Electronic Manual 1077

59 Records Management 1079

Record-Keeping Costs 1079Record-Keeping Policies and Procedures 1080Required Tax Records 1084

Computer-Based Record Keeping 1086

Contents xxiii

Obsolete Inventory 1100How to Avoid the Inventory Tracking Problem 1101

61 Tax Records and Procedures 1105

Tax Organization 1106Centralized Tax Department 1107Functions of the Tax Manager 1108Tax Communications 1109Tax Records in General 1109Tax Calendar 1110

Tax Information Records 1110Tax Working Papers and Files 1111Internal Revenue Code and Record Requirements 1111Differences Between Income Tax Accounting and Book Accounting 1113Proper Classification of Accounts 1114

Other Taxes 1114Income Taxes and Business Planning 1115Special Tax Reports 1115

62 Risk Management 1117

Risk Management Policies 1117Risk Management Procedures 1118Trends in Insurance Coverage 1121Manager of Risk Management 1121Types of Insurance Companies 1122Claims Administration 1123Insurance Files 1124Annual Risk Management Report 1125

Interest Tables

Simple Interest Table 1127

Compound Interest (Future Amount of 1 at Compound Interest Due in N Periods) 1127

Compound Interest (Present Value of 1 Due in N Periods) 1128Present Value of Ordinary Annuity of 1 per Period 1128Future Amount of Ordinary Annuity of 1 per Period 1128

PART 1 THE BROAD MANAGEMENT ASPECTS OF

CONTROLLERSHIP

FUNCTION 5

1.4 ROLE OF THE CONTROLLER 6 1.5 IMPACT OF ETHICS ON THE ACCOUNTING ROLE 7 1.6 EVOLVING ROLE OF ACCOUNTING 9

1.1 INTRODUCTION

Before a controller can delve into the specifics of the controller job description, it is first necessary

to determine how the accounting function fits into the rest of the organization This used to be asimple issue; the accounting staff processed transactions to support business operations — period.This required a large clerical staff managed by a small cadre of people trained in the underlyingtechniques for processing those transactions In this environment, the stereotypical image of anintroverted controller pounding away at a calculator was largely accurate

The role has undergone a vast change in the last few decades, as technological improvements,the level of competition, and a shifting view of management theory have resulted in a startlinglydifferent accounting function This section describes how the accounting function now incor-porates many additional tasks, and can even include the internal auditing and computer servicesfunctions in smaller organizations It then goes on to describe how this functional area fits into andserves the needs of the rest of the company, and how the controller fits into the accounting func-tion Finally, there is a discussion of how ethics drives the behavior of accounting employees, andhow this shapes the way the accounting staff and controller see their roles within the organization

In short, this chapter covers the high-level issues of how the accounting function and its troller fit into the modern company, not only to process its transactions, which was its traditionalrole, but also to provide additional services

con-1.2 TASKS OF THE ACCOUNTING FUNCTION

The accounting function has had sole responsibility for processing the bulk of a company’s actions for many years Chief among these transactions have been the processing of customer bill-ings and supplier invoices Though these two areas comprise the bulk of the transactions, there hasalso been a long history of delegating asset tracking to the accounting function This involves alltransactions related to the movement of cash, inventory, and fixed assets Finally, the accountingstaff has been responsible for tracking debt, which can involve a continuous tracking of debt levels

trans-by debt instrument, as well as the payments made to reduce them These have been the based activities of the accounting staff

transaction-A multitude of changes in the business environment have altered the role of the accountingfunction One change has been the appearance of the computer services function In a larger com-pany, this function is managed within its own department and does not fall under the responsibility

4 Ch 1 Accounting in the Corporation

of the controller However, it is common for the computer services group to fall under the ment umbrella of the controller in a smaller company Likewise, the internal auditing functionfrequently falls under the controller’s area as well This function has expanded in importance overthe last few decades as companies realize the benefits of having an internal watchdog over keycontrols Though it should report directly to the board of directors, it is common for a small inter-nal auditing staff to report instead to the controller It is becoming more common for the computerservices and internal auditing functions to be integrated into the role of the accounting staff, espe-cially in smaller companies

manage-Besides adding new functional areas, the accounting staff has other new responsibilities thathave arisen due to the increased level of competition With worldwide barriers to competitioncrumbling, every company feels the pinch of lower competitive prices and now asks the account-ing staff to provide analysis work in addition to the traditional transaction processing These tasksinclude margin analysis on existing or projected product lines, geographic sales regions, or indi-vidual products In addition, the accounting staff may even be asked to serve on new productdesign teams, so that they can determine the projected cost of new products, especially in relation

to target costs Further, the accounting staff must continuously review and report on nonproductcosts, which can range from advertising to utilities This level of cost review and reporting callsfor a different kind of accounting staff than the traditional kind that did nothing but process largevolumes of transaction-related paperwork It now requires highly trained cost accountants andfinancial analysts, almost always with college degrees and professional certifications, to conductthe work

In addition, technology has drastically altered the skill levels required of the accounting staff.For example, employees must now know how to implement and operate accounting software, elec-tronic data interchange systems, paperless systems using digitized documents, and electronic cash.Because most of these elements of technology directly impact the transaction processing staff, it

is necessary to raise the standard of knowledge for these people Consequently, the education level

of even the lowest people in the accounting hierarchy must be improved to deal with changingcircumstances

The world of business has become more international Many companies are doing an increasingvolume of business with companies based in other countries This greatly increases the complexity

of accounting, for a company must now determine gains and losses on sales to other countries.There may even be bartering transactions with organizations that do not have ready access to cur-rency In addition, if there is no separate finance function, the accounting staff may be called on tohandle letters of credit and hedging transactions that are designed to reduce the level of risk thatgoes with foreign dealings All of these issues call for a level of skill that was not required in thedays of simple transaction processing

In the face of more intensive competition, many companies are also merging or acquiringsubsidiaries This adds a great deal of complexity to the accounting staff’s work, for it must nowcoordinate a multitude of additional tasks in other locations This includes setting up standard pro-cedures for the processing of receipts, shipments, and cash Also, closing the financial books at theend of each reporting period becomes much more complex, as the accounting staff must now coor-dinate the assembly and consolidation of information from multiple subsidiaries Even if a com-pany decides to consolidate all of its accounting facilities into one central processing location toavoid all this trouble, it still requires the management expertise to bring together the disparateaccounting systems into a smoothly operating facility This is not an easy task The environment ofmergers and acquisitions greatly increases the skill needed by the accounting staff

The tasks of the accounting function are itemized below The tasks that belong elsewhere—butare commonly given to the accounting staff in a small company—are noted under a separate heading

• Traditional accounting tasks

Accounts payable transaction processing

Accounts receivable transaction processing

Asset transaction processing

Debt transaction processing

1.3 Role of the Accounting Function 5

• New accounting tasks

Bartering transactions

Coordination and consolidation of accounting at subsidiaries

Currency translations

Margin analysis

Nonproduct cost analysis

Selection, implementation, and operation of accounting software and related systems

Target costing

• New tasks assigned to the accounting function of smaller companies

Computer services systems installation and maintenance

Hedging and letter of credit transactions

Internal auditing programsGiven today’s highly volatile and ever-changing business environment, the only safe statement tomake about the new activities presented in this section is that they will only become more com-plex, requiring even greater skill by the accounting staff to be accomplished in a manner that isboth efficient and effective

1.3 ROLE OF THE ACCOUNTING FUNCTION

Having noted the expanded number of tasks now undertaken by the modern accounting function, it

is important to also note how the role of the accounting staff has changed in relation to the rest ofthe company

When the number of accounting tasks was more closely defined around transaction processing,

it was common for the accounting staff to be housed in an out-of-the-way corner of a business,where it would work without being impeded by other functions Now, with a much greater number

of tasks, the accounting staff finds itself involved in most major decisions For example, the costaccountant is expected to serve on product design teams and to let other team members know ifnew designs will have costs that will meet targeted cost goals An accounting analyst may be asked

by the sales manager to evaluate the profitability of a lease deal being extended to a customer Thecontroller is frequently asked to sit in on executive committee meetings to give opinions on thecash flow issues for acquisitions or purchases The accounts receivable clerk may work closelywith the sales staff to collect overdue invoices from customers For these reasons and others, theaccounting function now finds itself performing a variety of tasks that make it an integral part ofthe organization

A particularly important area in which the role of the accountant has changed is related to cesses When another area of the company changes its operations, which is increasingly common,the accounting staff must devise alterations to the existing systems for processing transactions thatwill accommodate those changes For example, if the manufacturing function switches to just-in-time production or computer-integrated manufacturing, this has a profound impact on the way

pro-in which the accountpro-ing staff pays its bills, pro-invoices customers, monitors job costs, and createsinternal reports Also, if the materials management staff decides to use material requirements plan-ning or integrated distribution management, these new systems will issue information that is ofgreat use to the accounting staff; it should connect its systems to those of the materials manage-ment staff to access that information To alter its processes, the accounting staff must first be aware

of these changes, requiring the accounting staff to engage in more interaction with other parts ofthe company to find out what is going on

The most historically important role that the accounting staff must change is that of being abrake on other activities Because most accountants are trained in implementing controls to ensurethat assets are not lost, the accounting staff tends to shoot down changes proposed by other depart-ments — the changes will interfere with the controls The accounting personnel must realize thatchanges put forward by other functions are not intended to disrupt controls, but to improve the

company’s position in the marketplace or to increase its efficiency This means that some controlsmust be modified, replaced, or eliminated It is very helpful for the accounting personnel to have

an open mind about altering systems, even when the new systems interfere with the accountingstaff’s system of controls

In today’s increasingly competitive environment, it is very important for companies to developstrong relationships with their key suppliers and customers These business partners will demandextra services, some of which must be fulfilled by the accounting staff These changes may includeusing electronic data interchange transactions, providing special billing formats to customers, orpaying suppliers by electronic transfer If these steps are needed to retain key business partners,then the accounting staff must be willing to do its share of the work Too frequently, the accountingstaff resists these sorts of changes, on the grounds that all transactions must be performed inexactly the same manner The accounting department must realize that altering its way of doingbusiness is sometimes necessary to support ongoing business relationships

Altering the focus of the accounting staff from an introverted group that processes paper to onethat works with other parts of a company and is willing to alter its systems to accommodate theneeds of other departments is required in today’s business environment This is in great contrast tothe accounting department of the past, which had a minimal role in other company activities, andwhich was its conservative anchor

1.4 ROLE OF THE CONTROLLER

The controller has traditionally been the one who manages a few key transaction cycles, monitorsassets, and delivers financial statements Though the details of the position are covered in Chapter

2 suffice it to say here that the position has expanded to a great extent As noted earlier in thischapter, the accounting function as a whole is now required to take on additional tasks, to workwith other departments more closely, to continuously offer advice to senior management, and toalter systems to match the changing needs of other areas of the company All of these changes havehad a massive impact on the role of the controller within the organization

The key factor is that, due to the vastly increased interaction with other departments, the troller must be highly skilled in interdepartmental dealings This involves constant interactionswith fellow department heads, attendance at a swarm of meetings, and the issuance of opinions on

con-a vcon-ariety of topics regcon-arding the running of functions with which the controller previously hcon-ad noconnection Because of this changed role, the controller must now have top-notch interpersonaland management skills — the former to deal with other departments and the latter to oversee thechanges needed by the other departments

In addition, the controller must govern a group of employees that is much more educated thanwas previously the case This requires constant attention to the professional progress of each per-son in the department, which requires goal setting, mutual discussion of training requirements, andcontinuous feedback regarding employee performance This clearly calls for management skills of

an order far higher than formerly required of a controller that presided over a clerical function.Also, the wider range of functions managed by the controller now requires a wider range ofknowledge Besides the traditional training in accounting, a controller now needs at least a passingknowledge of computer systems, internal auditing, and administrative functions (because this areafrequently falls under the controller’s area of responsibility) In addition, traditional accountingfunctions have now become more complex; a controller must know about outsourcing accountingfunctions and managing in a high-speed growth environment, as well as the increasing complexi-ties of tax laws, Securities and Exchange Commission (SEC) filings, and generally accepted account-ing principles It would take a perpetual student to have an in-depth knowledge of all these areas,

so it is more common for the controller to manage a cluster of highly trained subordinates who aremore knowledgeable in specific areas, and who can advise the controller as problems arise

In short, the role of the controller has expanded beyond that of a pure accountant to someonewith broad management and interpersonal skills who can interact with other departments, as well

as manage the activities of an increasingly well-educated group of subordinates, while also working

1.5 Impact of Ethics on the Accounting Role 7

with them to further their professional careers This is a much more difficult role for the moderncontroller, requiring someone with at least as much management experience as accounting knowledge

1.5 IMPACT OF ETHICS ON THE ACCOUNTING ROLE

With the globalization of business, competition has become more intense It is possible that theethical foundations to which a company adheres have deteriorated in the face of this pressure.There have been innumerable examples in the press of falsified earnings reports, bribery, kick-backs, and employee thefts There are vastly more instances of ethical failings that many wouldperceive to be more minimal, such as employee use of company property for personal use, “smooth-ing” of financial results to keep them in line with investor expectations, or excessively robust sales

or earnings forecasts The controller and the accounting staff in general play a very large role in

a company’s ethical orientation, for they control or have some influence over the primary issuesthat are most subject to ethical problems — reported earnings, cash usage, and control over assets.This section discusses how the accounting function can modify a company’s ethical behavior — forgood or bad

The accounting function can have a serious negative impact on a company’s ethical standardsthrough nothing more than indifference or lack of caring For example, if the controller continuallyacquiesces to management demands to slightly modify the financial statements, this may eventu-ally lead to larger and larger alterations Once the controller has set a standard for allowingchanges to reported earnings, how can the controller define where to draw the line? Another exam-ple is when the accounting staff does not enforce control over assets; if it conducts a fixed-assetaudit and finds that a television has been appropriated by an employee for several months, it canindirectly encourage continuing behavior of this kind simply by taking no action Other employeeswill see that there is no penalty for removing assets and will then do the same thing Yet anotherexample is when the accounting staff does not closely review employee expense reports for inap-propriate expenditures Once again, if employees see that the expense report rules are not beingenforced, they will gradually include more expenses in their reports that should not be included.The accounting staff has a significant negative influence over a company’s ethical standards simply

by not enforcing the rules

The previous argument can be turned around for an active accounting department If the troller and the rest of the accounting staff rigidly enforce company policies and procedures andacquire a reputation for no deviations from these standards, the rest of the corporation will bedragged into line It is especially important that the controller adhere closely to the highest stan-dards, for the rest of the accounting staff will follow the controller’s lead Conversely, if the con-troller does not maintain a high ethical standard, the rest of the accounting staff will have noethical leader, and will quickly lapse into apathy Accordingly, the controller is a company’s chiefethics officer, for the position has such a strong influence over ethics It is a rare week that passeswithout some kind of ethical quandary finding its way to the controller for resolution

con-It is not sufficient to merely say that the accounting staff must uphold high ethical standards, ifthe standards are not defined To avoid this problem, the controller should create and enforce acode of ethics This document may not originate with the controller—many chief executive offic-ers (CEOs) prefer to take on this task However, the controller can certainly push for an ethicalcode to be developed higher in the organization Some illustrative topics to include in a code ofethics are:

• Bidding, negotiating, and performing under government contracts

• Compliance with antitrust laws

• Compliance with securities laws and regulations

• Conflicts of interest

• Cost consciousness

• Employee discrimination on any grounds

• Gifts and payments of money

• Hazardous waste disposal

• International boycotts

• Leave for military or other federal service

• Meals and entertainment

• Political contributions

• Preservation of assets

• Restrictive trade practices

• Standards of conduct

• Use of company assets

• Workplace and product safety

The wide range of ethical topics, some going well beyond the financial arena, make it obvious thatthe CEO really is the best source of this document, rather than the controller, though the controllercan certainly contribute to those portions relating to financial issues

Once the code of ethics has been created, it must be communicated to all employees Onceagain, this is the CEO’s job, but the controller should constantly reinforce it with his or her staff It

is especially helpful if the controller visibly refers to the ethical code whenever an ethical issuearises, so that the accounting staff knows that the controller is decisively adhering to the code

A code of ethics becomes the starting point in the series of judgments a controller must followwhen confronted with an ethical issue The logical series of steps to work through are:

• Consult the code of ethics Having a corporate code of ethics is a great boon to the controller,

for he or she can use it as the basis for any ethics-related decision A senior company officerwould have difficulty forcing the controller to adopt a different course of action than what isprescribed by the code of ethics, since this would go against a directive of the Board ofDirectors If the controller feels it is necessary to take a course of action contrary to what isstated in the code, then the reasons for doing so should be thoroughly documented If there is

no code, then proceed to the next step

• Discuss with immediate supervisor The controller’s immediate supervisor is probably either

the Chief Financial Officer (CFO), Chief Operating Officer (COO), or CEO These are themost senior positions in the company, occupied by people whose behavior should be at anethically high standard Consulting with them for advice is a reasonable second step in theabsence of a code of ethics However, if the supervisor is the one causing the ethical problem,then skip this step and proceed to the next one

• Discuss with a trusted peer There is usually someone within the company in whom the

con-troller places a great deal of trust If so, consult with this person in regard to the propercourse of action Be more circumspect in doing so with a person outside the company, sincethis runs the risk of spreading information elsewhere, with possible deleterious conse-quences If there is no one with whom to discuss the issue, then proceed to the next step

• Discuss with the company’s ethics committee If there is an ethics committee, this is a good

forum for discussion Unfortunately, many companies do not have such a committee, or itmeets so infrequently that the immediate needs of the controller may not be met through thisapproach In either case, proceed to the next step

• Discuss with the Board’s audit committee Many boards have an audit committee, which

should be comprised entirely of independent directors If so, the controller should take his orher concerns to this group Keep in mind that this is a serious step, since the controller is nowgoing around the corporate reporting structure, which may have unenviable consequenceslater on if the controller chose not to tell senior management of this action

• Consider leaving the company If all these avenues are untenable or result in inadequate

advice, the controller should seriously consider leaving the company in the near future.Reaching this final step probably means that the ethical issue is caused by senior manage-

1.6 Evolving Role of Accounting 9

ment, and also that there are no outside checks on their ethical behavior, such as an auditcommittee of the Board of Directors

It is extremely important that the controller issue consistent rulings on ethical issues, so thatemployees know they are being treated fairly Though it may seem like a vast increase in paper-work, it may be useful for the controller to record all ethical rulings in a single document, so thatthere is a good reference source in the event of future ethical problems This allows the controller

to go back and see what judgment was given in previous cases, thereby giving the controller quate grounds for treating new issues in a similar manner

ade-In summary, the accounting staff has a large role in enforcing ethical standards throughout acompany, since it has such strong influence over several key areas that require ethical judgments,such as the quality of reported earnings, control over assets, and the uses of cash Accordingly, it isvery much in the controller’s interests to have a code of ethics that the accounting staff can adhere

to in enforcing the appropriate ethical standards

1.6 EVOLVING ROLE OF ACCOUNTING

Though there are many variables that can impact the direction of the accounting function and thecontroller’s role in the future, there are a few broad trends that are likely to continue, and fromwhich one can predict the evolving role of accounting

The accounting function is in the midst of a fundamental change from being a clerical groupwithout significant training to a cadre of very experienced technicians and managers Though therewill always be a need for clerical help (indeed, this group will continue to comprise the majority ofthe department), there will be an increasing focus on bringing in more experienced personnel Thisprediction is based on the technological trend that brings continued levels of automation to theaccounting function, thereby reducing the need for clerks Also, the same trend toward more tech-nology means that a greater proportion of the accounting employees must have better training inhow to use the new hardware and software These trends will force the accounting department ofthe future to stock up on highly trained personnel with good management skills

The accounting department is likely to become a more common route to top management tions The accounting area has always been a fertile one for training people in the nuts and bolts oftransactions, and how they must function This is useful for a lower-level manager, but now thatthe department also handles a multitude of additional tasks, such as cost analysis, target costing,and advanced finance functions, it becomes a much better training area for higher-level managers.The company of the future will not only see large numbers of well-trained people advancing out ofaccounting, but they will also see a large proportion of new recruits clamoring to get into it, so thatthey too can receive the necessary training and experience

posi-This section discussed some evolutionary changes to expect in the role of the accounting tion and the controller It is likely that there will be a decrease in the proportion of purely clericalpositions in the accounting area, in favor of more senior personnel with extra technical and man-agement skills Also, because of the greater breadth of responsibility to be obtained in this area, itwill become more common for senior management personnel to come out of this area

2.8 CONTROLLER’S JOB DESCRIPTION 16 2.9 RELATIONSHIP OF THE CONTROLLER

TO THE CHIEF FINANCIAL OFFICER 18 2.10 FUTURE CHANGES IN THE

CONTROLLER’S ORIGINS AND RESPONSIBILITIES 19

2.11 MANAGING EXPLOSIVE GROWTH 20

2.1 INTRODUCTION

A controller’s job can vary dramatically based on a company’s size and whether it has other agers in place who handle related functions If a company is small and there are few other manag-ers, the controller may end up with a formidable list of tasks on the job description However, as acompany grows in size, the role becomes more precisely and narrowly defined This chapter coversthe full range of the activities that may be assigned to a controller, beginning with the classicalmanagement areas of planning, controlling, reporting, and maintaining key accounting processes,and expanding into ancillary functions that may become part of the controller’s job, depending onthe circumstances In addition, the chapter touches on variations in the controller’s title, and why

man-the term controller, though most commonly used, is perhaps not man-the best description for man-the job.

The chapter concludes with a review of the relations between the controller and chief financialofficer (CFO), the future job description of the controller, and how to manage in an explosivegrowth environment This wide-ranging discussion gives the reader a comprehensive view of thecontroller’s job

2.2 VARIATIONS ON THE TITLE

Numerous titles can be applied to the position of the chief accounting officer; however, the mostcommon title used is controller The duties are sometimes assumed by a chief accountant, officemanager, comptroller, treasurer, assistant treasurer, or secretary However, with the increasedemphasis on accounting control, increased management duties, and for additional statistical andfinancial decision-making information, the duties of the position are more frequently being segre-gated into the role of a separate manager called the controller This is especially true in larger orga-nizations, where there is much more specialization The term controller is an unfortunate one, for

it seems to emphasize the control function only; as the reader will find after reading this chapter,there are a number of other basic functions this person performs, such as planning, reporting, andmanagement, that are just as important as the control function The chief accounting officer (CAO)

title is a more complete description of the position; however, due to common usage, the term troller will have the same meaning as CAO in this book.

con-2.3 PLANNING FUNCTION

The establishment and maintenance of an integrated plan of operation is a major function of thecontroller The business objective is profit, and planning is necessary to fulfill it, for profits do not

“just happen.” Visualize, then, the role of the modern controller in business planning

First, there is a responsibility to see that a plan exists and that it is supported by all levels ofmanagement The implication of an integrated plan is that all parts will link together to support thebusiness objective For this reason, all members of management must participate willingly andcontribute to the information in the plan It must be the company’s plan and not the controller’splan The controller’s primary task is to act as the coordinator who assembles and maintains theplan, which results in a statement of forecasted income and expense, as well as a set of supportingschedules and assumptions In more detail, the following points describe the controller’s key tasksrelated to the plan:

• Verify that the sales plan or forecast supports known corporate policies and objectives, such

as geographic areas to enter and types of products to sell

• Verify that the sales plan appears to have realistic assumptions, such as an expected sales amount

per salesperson that is valid based on past history

• Verify that the production plan supports the sales schedule This involves comparing the

amount projected to be sold to the amount to be produced, while factoring in the amount offinished goods inventory already on hand

• Verify that the production plan is within facility capabilities This involves comparing

pro-jected production volumes to the company’s history of production rates, also factoring in theaddition of extra shifts

• Verify that expense levels are in proportion to other activities For example, the utilities

expense must go up if the company is adding a facility, while the travel expense must increase

if there will be a larger sales staff

• Verify that there is sufficient funding for the projected activity If there is not a sufficient

amount of debt or equity funding, the plan must be recast on a smaller scale

Once the plan has been completed, the controller should test or appraise its adequacy and report tothe CFO or chief executive officer (CEO) on the results of this analysis It must be judged based onthe following concerns:

• In light of past experience, is it realistic?

• Does it reflect economic conditions that are expected to prevail in the period of the plan?

• Have the related expenses for product lines designated to be discontinued, such as production

equipment or inventory disposal, been considered?

• Does it meet the company’s requirements for return on investment and such other ratio or

other tests as may be applicable?

Some of the testing and analysis will be accomplished as preliminary plans are formulated, and therest will await the total picture However and whenever it is done, the controller is the counselorand coordinator, extending advice and suggestions to all who need it during the plan preparation.Final responsibility for the plan rests with the CEO, and responsibility for each operating functionmust be that of the manager in charge of each function Nonetheless, though responsibility for theplan lies elsewhere, the controller should be deeply immersed in the underlying mechanics andassumptions of the plan; the company relies on the controller to perform this function

2.6 Accounting Function 13

of each function, so that they can enforce control-related issues The controller cannot enforcecontrol issues in other departments, since there is no managerial oversight of those areas, but thecontroller does correct control-related problems within the accounting function

Activities in the control function absorb a large portion of the accounting staff’s time Somecontrol information is provided to management by the accounting staff every day; other data areprepared less frequently, as circumstances require For example, larger companies that are laborintensive may find that hourly or daily information on labor performance may be helpful, orweekly manufacturing expense figures may be needed

However, the controller’s involvement does not end with the mere feedback of reporting mation to various parts of a company Instead, the controller must devote a great deal of time toflowcharting existing systems, examining the results for control issues, and implementing processchanges that will eliminate the control problems Only after all this activity will a controller beable to issue reports on the results of controls

infor-A manager cannot control the past Instead, one can study past action to determine the placeand cause of deviation Here, as in planning, the best kind of control is forward looking The con-troller must keep this orientation in mind while participating in the control function, giving con-stant thought to steps that might be taken before the operating action to ensure the desiredperformance level This is preventive or anticipatory control

A controller must become heavily involved in all stages of the control function, which extendsfrom system analysis through problem identification and change implementation, ending in controlreports that note the results of the control alterations This is one of the most crucial tasks for thecontroller

2.5 REPORTING FUNCTION

Insofar as it concerns internal management, the reporting function is closely related to both theplanning and control functions Reporting is essential to make planning and control effective Yetthe reporting function is not merely one of presentation of tabulations and is not wholly routine,although some phases can be automated Moreover, the management that makes decisions oftencannot be kept adequately informed solely from periodic statements regardless of how well designed

they may be The reporting function encompasses the interpretation of the figures, and the

control-ler’s duty is not discharged until management actually understands what is being presented Ensuring that management understands what it reads calls for an entirely separate set of skillsthan those given a controller in business school This requires constant informal meetings with allrecipients of accounting reports, not only to go over excessively large variances, but also simply toensure that they understand what they are reading A good supplemental method is to construct aformal training program that describes the nature and significance of the information being issued,and to constantly update and again present this training to management Even a quarterly reitera-tion of the training is not always sufficient

In addition, the controller may be required to report to outside entities, which usually calls forsome reformatting of the internal reports Typical recipients of reports are shareholders, creditors,the general public, customers, the Securities and Exchange Commission (SEC), and the InternalRevenue Service (IRS)

The controller is not only responsible for assembling data on a large number of topics into ily readable reports for consumption both inside and outside the company, but also for ensuringthat the recipients understand what they are given

eas-2.6 ACCOUNTING FUNCTION

The systematic recording of financial transactions is often regarded as the principal function of thecontroller The controller is expected to apply sound accounting principles and practices within thecompany, as well as to stay current on the latest technological advances, so that this can bedone in the most effective and efficient manner possible The last few decades have revealed fur-