Financial Reporting & Accounting

The Unnecessary Risk of Poor Accounting Process Documentation

Written documentation of accounting procedures is often given a low priority in the accounting department. Many companies have seasoned employees, who may not need step-by-step directions to complete the monthly close process, prepare account analysis, or complete account reconciliations. In the interest of completing other business-critical tasks, they push updating written procedures to the back burner.

And they drastically increase their risk should a key employee abruptly leave.

Many CFOs have Controllers or VPs of Finance who manage the day-to-day operations of the accounting department. If that Controller were to abruptly depart:

  • Would the CFO be able to step in and lead the accounting department without business interruption?
  • Are there written procedures to help guide the CFO and accounting team until they can hire a replacement?
  • Does the accounting department have a strong enough understanding of the accounting regulations to move forward without their current leader?

Those types of questions point at real financial planning & analysis concerns and business risks that should be moving accounting process documentation from the back burner to front-and-center on the stovetop.

When Employees Leave Suddenly and Unexpectedly

Life is unpredictable! I’ve worked on quite a few client engagements after a key managerial employee was terminated or abruptly left the company. In fact, recently, I worked with a client whose Controller suddenly died in the middle of an audit at the young age of 42! Tragically, this client faced the manifestation of the figurative hit-by-a-bus jokes they’d told each other. To make matters worse, they had no written documentation to support critical accounting procedures managed by the employee nor any written documentation for key business decisions or support for specific recorded journal entries. They also failed to establish cross-training plans.

Facing these limitations, we had to retrieve data from the employee’s computer and conduct interviews with staff and other internal business partners to figure out exactly what was completed by the former employee prior to his untimely passing.

In my consulting experience spanning over a decade, I have observed on multiple occasions accounting teams accustomed to complying to the Controller’s requests, without deep understanding of the accounting regulations or the rationale for the journal entries they recorded. Commonly, when asked why certain journal entries were booked, their answers include “The Controller told me to book it,” or “The Controller handled the details.”

The Hidden Risks of Poor Accounting Process Documentation to CFOs

A CFO facing an abrupt departure from a Controller faces three business risks they might not have considered are related to documentation:

1. The CFO could be taken away from driving the business.

A CFO’s time should be spent identifying new business opportunities, improving financial performance, and maintaining good customer relations. When a key managerial employee departs without leaving adequate written documentation, the CFO typically is forced into guiding the accounting team. This scenario can have a significant impact on smaller companies.

It can also lead to human resources issues down the road. After a CFO is pulled into the day-to-day operations for a few months, the pressure to hire a replacement rises, so the CFO can return to their normal responsibilities. I’ve experienced a few instances where that hiring decision was rushed, and the replacement wasn’t the right fit for the organization. The CFO found himself back in the same high-pressure position in 90 days!

2. Audits could be delayed.

Auditors always request support for account analysis or even journal entries. When the support is not attached or rationale not documented, the audit can extend and create additional audit fees. Without process documentation, auditor questions often cannot be addressed. Creating that missing documentation can take the accounting team away from their other business-critical responsibilities.

3. Regulatory reporting could be delayed.

Companies may have SEC reporting or reporting due to other organizations like lenders. If the recently departed employee was focusing on reporting but not the reporting process documentation, the remaining team members will have to spend time to figure out the complete process. This can lead to delayed reporting and may even force the CFO to obtain late waivers as they research the process.

In instances of delay, the CFO must take on the responsibility of explaining those delays to the President and Audit Committee.

Best Practices for Accounting Process Documentation Projects

Depending on the span and complexity, it can take companies 2 – 12 months to fully document key accounting processes and ensure work completed is adequately supported. This type of expenditure and effort can be avoided when a company invests in allocating time to develop written procedures in advance of an untimely departure.

Below are a few tips for tackling documentation projects:

Create written desktop procedures for all key areas.

Develop a plan to ensure you have written desktop procedures for all key areas. Schedule meetings with the applicable staff and internal partners to review drafts of the procedures to confirm accuracy. Store non-confidential procedures in a centralized location for the accounting team. Set up a secure drive for confidential procedures and provide senior management access to the drives.

Discuss new accounting pronouncements with the accounting team.

Management typically takes the lead on reviewing new accounting regulations and understanding the impact to the company. Once the impact has been determined, review it with the applicable accounting team members so they understand how it impacts the business. Consider incorporating key topics into monthly staff meetings. Spend additional time with the staff person that handles the area to confirm they understand accounting theory and would be able to carry on in the event of an emergency.

Attach support to all journal entries.

During the close process, a company is often up against tight deadlines. It is important to be diligent and ensure that all entries are supported. If adjustments are made after management review, don’t forget to go back and adjust the supporting documentation. Consider establishing a post-close audit process to ensure adequate support is attached to each journal entries.

Cross-train employees.

Identify critical functions within the department and develop a cross-training plan. This is a great way to develop your team and expose them to different areas in the organization while training a back-up for key areas.

A Note About Bandwidth

All the above tips help ensure that if a key employee abruptly leaves, you’ll have adequate documentation for the individuals that will manage the area. This can empower the accounting department to manage any untimely departures, and it can keep the CFO from having to neglect his or her normal responsibilities of driving the business.

If your Company does not have adequate time or bandwidth to spend on written documentation, 8020 Consulting can help. In fact, having a new set of eyes to review and document the process will provide a lot of additional benefit. The consultant will also can help highlight opportunities to streamline current processes, making it well worth the investment. You can click here to contact us for more information.

financial reporting and analysis solutions whitepaper

About the Author

Kim is a CPA and PMP with more than 20+ years of diverse financial reporting and accounting leadership experience. She is an Arthur Andersen alumnus with extensive experience in accounting operations, inventory accounting, supply chain operations, project management, process reengineering, systems implementation, policy and procedure development, training development, internal controls and audit. She has also served as Interim Controller and led accounting teams through the monthly close and external audits. Kim has industry experience in pharmaceutical, retail, manufacturing, distribution, technology, banking, family investment and telecommunications at companies including The Disney Stores, Countrywide Bank, Data Direct Network, Silgan Containers, Fandango, THQ, The Rockefellers and Bristol-Myers Squibb with global assignments in the USA, Europe and Asia. Kim holds a Bachelor of Science in Accounting from Syracuse University.

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