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NPA Consultants Blog / News

Five Questions that Every Audit Committee Should Ask

jmc portrait thumb smallerThe Audit Committee’s ability to evaluate accounting operations can be especially difficult because of the dependent relationships between Senior Management, the Audit Committee, and the Independent External Auditors (including their desire to retain the client).

In advising our clients’ Boards of Directors, we recommend that Audit Committees ask their Auditors the following five questions and make Senior Management and the Auditors aware of their intention to do so. Providing advance notice gives all parties an opportunity to alleviate problems, improve the organization, and minimize less than complimentary answers.

1. How would you rate the accounting/finance team compared to the organization’s needs? What changes would you recommend?

– Please rate senior staff (i.e., CFO, Controller, and Accounting Manager).

– Please rate general accounting staff.

– Has personnel turnover been excessive?

– Are additional staff needed?

2. How would you rate the general ledger software package and modules compared to the organization’s needs? What changes would you recommend?

– Is the software package being used in a less than optimal manner?

– Are additional modules available which would improve efficiency and accuracy in financial statement preparation?

– Is the accounting staff sufficiently well trained in the use of the software?

– Has the organization updated the software to the most current version available?

3. Are the accounting system and personnel capable of producing accurate, timely monthly and annual financial statements efficiently and with a minimum of “heroic” effort by personnel?

– Is the participation of the Independent auditors in preparing financial statements required beyond the most minimal levels?

4. Is the system of internal control too reliant on management review? What changes would you recommend?

5. Was the audit started and carried out in a timely fashion, or were starting dates delayed and delivery dates missed or deferred?

Simple Steps to Help Avoid (Or Catch) Corporate Embezzlement

jmc portrait thumb smallerThis week I received two calls informing me of embezzlement by two trusted CFO’s, one from a charity I contribute to and the other a private company.  No organization is immune, but there are always some simple principles you can follow to make misappropriation of money harder for someone with an evil inclination.  Here are three not-necessarily-obvious checks everyone can perform:

1.      Can one person easily create and consummate a transaction without anyone else’s review or approval?  This is by far the characteristic most common to these crimes.  No matter how small the organization, and no matter how dependent on one person the organization is, small control steps can be implemented to mitigate much of the risk.

2.      Avoid the “it can’t happen here” attitude.  Even if you are convinced of it, consider that the procedures for insuring accuracy of accounting overlap with controls for avoiding theft, so implementing new steps to avoid innocent mistakes can cover both risks.

3.      Are there any key accounting employees who seem “never” to take a real vacation?  This is a classical tip-off for someone who doesn’t want anyone else to ever see what they are doing.

Naturally, the larger and more complex an organization is, the more fertile the ground for illegitimate behavior, but also the more opportunity for implementing effective controls easily.

NPA Consultants are specialists in Policies, Procedures and Controls. We perform inexpensive assessments for organizations from $1M to $100M in revenue. We are also happy to answer any questions. Contact us at info@NPAccountants.com or 617 694 4600.

 

How to Really Forecast Cash Flow

jmc portrait thumb smallerUnfortunately, the great majority of companies use the same format for internal cash flow forecasting as they do for their annual financial statements. This format is at best a poor substitute for a useful management tool and at worst a source of confusion.

A truly useful management tool called the “direct method” uses the same intuitive logic that any of us would use in compiling a cash budget for our household. It itemizes cash receipts and cash expenditures rather than showing (obtuse) changes in balance sheet balances.

Our cash flow model can be set up in a day.  It applies very simple, easily understood formulas and produces not only a cash flow forecast but a forecasted balance sheet as well.  This is especially crucial to clients with an asset-based bank line of credit, for example, because the model forecasts month-end accounts receivable, inventory, and available loan balances.

Here’s how the basic concept works.  We begin with monthly Sales [Revenue] and estimate the timing of receipts from collecting accounts receivable.  Similarly, we start with the company’s standard expenses (including cost of goods sold and general expenses) and estimate the timing of actual payments against them.  This gives management direct insight into each piece of the organization’s cash flow and shows the result of improving any of them.

Here’s a simple (somewhat exaggerated) forecasting example.  All cash receipts and disbursements lines would come from simple, easily understood, transparent tables.

Month 1

Month 2
Beginning of period cash balance

$10,000

$10,000
Cash receipts from collecting accounts receivable

500,000

750,000
Cash receipts from loan drawdown

270,000

–           
     Total receipts

770,000

750,000
Cash expended to pay for purchase of inventory

(350,000)

(300,000)
Cash expended to pay general expenses

(400,000)

(400,000)
Cash expended to pay down loans

(30,000 )
Cash expended to purchase fixed assets

( 20,000)

(20,000 )
     Total expenditures

(770,000)

(750,000)
End of period cash balance

$ 10,000

$ 10,000

NPA Consultants are specialists in Financial Reporting, Policies, Procedures, and Internal Controls.  We are happy to answer any questions.  Contact us at info@NPAccountants.org or 617 694 4600.

Proper Care and Feeding of Your Software

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By John Cohen

As Process Improvement Consultants, we are often involved in software evaluation and software conversions.  One of the most prevalent mistakes we see is the notion that once a software package is successfully installed, no further serious attention is required.  “If it ain’t broke, don’t fix it” seems to be the motto.

No, no, and no.  Virtually every software package should be professionally reviewed annually, or at least every two years.  Like performing oil changes on your car, calling in your software consultant for a one or two day review is an inexpensive practice which can yield many benefits, both current and long term.

Here are five broad questions which management should ask:

1.  Has the organization kept current on software updates, patches, etc.?

  •  A “no” answer represents a high risk situation which can be corrected very inexpensively.

2.  Is the company using the current software modules in the manner the software was originally designed for?  Has the software lost some functionality over the years by employee turnover?

  • A loss of functionality generally devolves into time wasting unnecessary manual procedures often simply taken for granted as legacy from past years.

3   Can the organization benefit financially by upgrading the software to a newer version, adding modules, or changing the hardware configuration? 

  • More sophisticated versions of classical programs and hardware configuration innovations such as cloud computing can be a financial boon to the bottom line.

4   Are the reporting and budgeting capabilities of the software under-utilized because the organization is accustomed to using Excel spreadsheets?

  • Excel is no substitute for accounting software.  It can absorb immense amounts of time and is alarmingly prone to human error.

5   Has unnecessary data been purged from the system?

  • Organizations which have large numbers of transactions are especially subject to clogging their software (and slowing speed) with old, out of date data such as backordered purchase orders, discontinued vendors, etc.

NPA Consultants are specialists in Policies, Procedures, Internal Controls and Financial Reporting.  We help accounting departments run “better, faster, cheaper,” and Boards of Directors/senior managements insure that they are performing their fiduciary duties at the highest possible level.  We are happy to answer any questions.  Contact us at info@NPAccountants.org or 617 694 4600.

 

Common Problems Selling Your Business and How to Avoid Them

jmc portraitjmc portrait thumb smallerBy John Cohen

If you are thinking about selling your business – even if several years away – these simple tips will make your journey easier and put money in your pocket.

1. Pick your professional advisors early and carefully.  You need at least three key professional advisors to lay the groundwork early, carry through the process, and complete the transaction.

– Strong CPA’s to provide creditable audited financial statements
– Lawyers well-versed in corporate law and tax;
– An investment banker who can be a real business advisor – not just a sales agent – to help you position your company for maximum advantage.

2. Stay local. Large geographical differences will cause unexpected problems. Someone from California who claims special talents can be duplicated many times between the East Coast and West Coast.

– A local advisor can easily stay in touch and be available for informal advice, including almost ad hoc meetings or lunch/dinner. Your desire for a 2 hour face to face meeting with a distant advisor will encounter the natural impediment of the 6 hour flight he/she will try to avoid.
– A three hour time difference will create an incredibly annoying constant delay in communications by phone or email. Trust me, it will drive you crazy.
– When a name you don’t know from an office far away becomes a key person on “your team,” it is not too cynical to think you may be more of a training vehicle (or worse) than a highly thought of client. [My employer was once assigned an M&A senior manager from St. Louis, even though the firm had over 400 employees in their Boston office. It took only an hour or two on site at my company before we kicked her out.]

3. Do not be seduced by industry specialization. Industry specialization is almost always overrated and can actually be a disadvantage in some cases. Industry differences are almost always easily learned and adjusted to by smart professionals who know their professions and are willing to put in the effort to understand any unusual traits of your industry. If you aren’t sure, ask that potential advisor what particular benefits accrue from their prior experience in the industry.

John Cohen is an interim, part-time, and long-term CFO with experience in maximizing operations and business enterprise value for companies in a wide selection of industries.

Three Problems You May Not Know You Have

jmc portraitby John Cohenjmc portrait

At least four of our clients this winter and spring exhibited some common and costly mistakes which well-meaning – and otherwise competent – organizations make. Unfortunately, the costs generally don’t reveal themselves until “the horse is out of the barn”.

Also note that these problems occurred even though our clients had on-site IT management. Remember, the IT manager is generally responsible for keeping the infrastructure running, but generally has no responsibility (or knowledge) of individual programs.

1. Accounting software maintenance procedures not performed regularly. One of our biggest clients was great at updating to new versions promptly but had not performed specific maintenance in the accounting software package in five years. In the accounts payable module alone, this led to over 2000 unclosed purchase orders, hundreds of duplicated vendors, and other problems which not only slowed the IT processing time, but created constant confusion among accounting personnel. It also could have masked fraudulent transactions had they occurred.

2. “Roles and Responsibilities” within the accounting software not reviewed annually. One of our clients had clearly set up the general accounting roles in the department with “separation of duties” in mind, but over time, permissions within the software had evolved (or devolved) to the point where every member of the accounting staff had permission to access and input transactions in every module. One of our clients had a massive fraud only made easier to perpetrate by a lack of discipline in the software permissions.

3. Excel sheets continue to be relied on rather than integrating software programs or implementing new modules. Excel is wonderful, but too many organizations are still “over-using” it, rather than take the bold step forward of installing new modules or integrating other programs with the accounting software. Remember that Excel is no substitute for accounting software, that it can absorb immense amounts of time, and is alarmingly prone to human error.

NPA Consultants are specialists in Policies, Procedures, Internal Controls and Financial Reporting.  We help accounting departments run “better, faster, cheaper,” and Boards of Directors/senior managements insure that they are performing their fiduciary duties at the highest possible level.  We are happy to answer any questions.  Contact us at info@NPAccountants.org or 617 694 4600.

Is Your CEO Too Diligent?

by John Cohen

Many CEO’s control virtually all contact between the organization and the (independent) Board of Directors.  This practice may reflect the diligence of the CEO but also creates potentially serious risks to the organization and to the Board.

Insuring that the Board receives accurate information is within the CEO’s job description but also provides the CEO with the opportunity to hide “bad news.”  In the worst case, the CEO may be abusing his/her power within the organization while preventing the Board from getting even a whiff of brewing problems, including waste, fraud, and noncompliance with legal regulations and the organization’s policies.

Virtually every scandal involving a CEO exhibits a profile in which employees are afraid for their jobs, Board members are friends of the CEO, and the auditors work under the unstated threat of losing a good client.  Newspaper headlines are full of such examples, from local nonprofits to the infamous Enrons and Tyco’s of recent memory.

No one wants to make themselves into a pariah on a Board of Directors, especially a volunteer nonprofit board.  However, here are some standard “best practices” measures which are both inoffensive and very effective.

1. The Board (not the CEO) should recruit someone with strong accounting credentials (e.g., an experienced CPA or CFO) to become a Board member.  He/she can suggest more thorough or more understandable financial statement information, can ask “hard” questions, and will reduce dependence on the CEO for explanations of data.

2. The Board should form an Audit Committee to which the CPA audit firm reports directly and communicates outside the presence of the CEO.  The Audit Committee is not to be confused with a Finance Committee, which generally expends most of its effort in the budget effort and analysis of interim financial results.

3. Arrange to have a short presentation by different managers at each Board meeting.  These presentations make Board members’ decision-making more informative and give the members the opportunity to ask questions which may result in some unexpected “red flag” reactions.

4. Consider a whistle-blower telephone line.  This is extremely effective and not costly.  Check with your legal counsel who can recommend a written policy and refer you to a service.

 

NPA Consultants are interim/part-time CFO/Controllers and Process Improvement Consultants, specializing in Governance, Policies, Procedures, Internal Controls, and Financial Reporting.  We help accounting departments run “better, faster, cheaper,” and Boards of Directors/senior managements insure that they are performing their fiduciary duties at the highest possible level.  We are happy to answer any questions.  Contact us at info@NPAccountants.org or 617 694 4600.

 

 

 

Quick and Painless Monthly Closings

By John Cohen

Every accounting department we have ever known is at least one employee short, and monthly closings too often rely on the Controller’s willingness to work long nights finishing the financial statements in the nick of time.  Sound familiar? 

Having been Controllers and CFO’s ourselves, we are not unsympathetic to this plight, and solving this problem is one of the ways we believe we add real value to our clients. 

Almost any closing can be set up efficiently in a short period of concentrated effort by attacking the 3 or 4 most obvious bottlenecks.  One of the first ones we look at is the format of closing schedules (i.e., worksheets). 

We set up closing schedules for our clients in a simple, consistent manner, with each month linked to the previous one.  Our goal is to set up the schedules so that almost anyone in the accounting department can prepare at least 80 – 90% of them – often surprisingly quickly and often before the month has even ended.  By spreading the work painlessly, the number of days to finish the closing is substantially reduced, and everyone’s job performance (and job evaluation) is improved. 

By investing in solutions to this and a few other issues commonly found in problematic closings, our clients have reduced their closing times by 50% and their pain by even more. 

NPA Consultants are specialists in Policies, Procedures, Internal Controls, and Financial Reporting.  We help accounting departments run “better, faster, cheaper,” and Boards of Directors/senior managements insure that they are performing their fiduciary duties at the highest possible level.  We are happy to answer any questions.  Contact us at info@NPAccountants.org or 617 694 4600.

Painless Annual Audit Preparation

Practical Advice for Businesses and Nonprofits

By John Cohen

Every accounting department we have ever known is at least one employee short, and preparation for the annual audit too often relies on the Controller’s willingness to work long nights finishing the closing in the nick of time.  Ditto for monthly closings (if there are monthly closings).  Sound familiar?

The mantra here at NPA Consultants is that “December (or June or September) is just another month.”  While we are glad to help controllers close the year because they are short of bandwidth, we are proud of our “value added” approach.

It is not uncommon for our procedures to reduce annual closings (and audit schedule preparation) from 6 weeks to 3 weeks, and monthly closings from 3 weeks to 1 week.

1. We set up closing schedules for our clients in a simple, consistent manner, with each month linked to the previous one.  Except for a few crucial accounts like (perhaps) reserve for bad debts, the analysis for the last month of the year is “just another month.”

2. We identify bottlenecks in the closing process and either solve the issues or accommodate them without letting them delay the closings.  Why let prepaid insurance or accrued vacation or even accounts payable tie you in knots when you can, in fact, avoid that aggravation?

3. We simplify the process so that almost anyone in the accounting department can be trained to prepare at least 80 – 90% of the schedules – often surprisingly quickly.  By spreading the work painlessly, the number of days to finish the closing is substantially reduced, and everyone’s job performance (and job evaluation) is improved.

By investing in solutions to your particular issues, your annual audit preparation can be “just another month” (almost).  We’re here to help.

NPA Consultants are specialists in Policies, Procedures, Internal Controls, and Financial Reporting.  We help accounting departments run “better, faster, cheaper,” and Boards of Directors/senior managements insure that they are performing their fiduciary duties at the highest possible level.  We are happy to answer any questions.  Contact us at info@NPAccountants.org or 617 694 4600.

Employees – The Good, the Bad, and the Weak

 By John Cohen

One of the benefits we provide our clients with is an evaluation of employees from an outside observer who has no axe to grind.  Most employees are good, upstanding people, and it is personally gratifying to bring under-utilized, under-appreciated employees to the attention of Senior Management.  But identifying the bad and the weak are also part of the job we do.

A manager/supervisor who sounds competent but within his/her department is either incompetent or a terrible manager is very difficult to detect by Senior Management.  But they are all too common.

So what to do?  No matter how small or large the organization, Senior Management does have tools to at least identify the worst of the worst and hopefully the best of the best. 
 
1. Keep a serious eye on employee turnover.  A department with high turnover may mean the good employees are leaving while the weak employees are willing to stay even under an incompetent – even tyrannical – supervisor.

2. Exit Interviews by a member of Senior Management are a fantastic tool.  Recognize and communicate the importance of Exit Interviews for employees who resign.  The best example we have seen is a CEO of a $20 Million dollar company who did all the exit interviews himself.  And although it’s tempting to have the Human Resources manager do the interviews, we mostly recommend against it.  The Human Resources manager is often too distant from the actual workings of operations, and we have seen cases where the Human Resources manager was the real problem to begin with.

3. Use both informal and formal communications to tell employees that Senior Management expects competency, integrity, and a friendly workplace.  A Senior Management which ignores these concepts is unknowingly fertilizing the weeds.

4. Caution.  Try not to use ingratiating “squealers.”  A squealer is often a bad employee to begin with.  Almost nothing is secret, and a Senior Management thought to be listening to these kinds of employees loses a lot of respect, morale, and productivity in the ranks of the good employees.

NPA Consultants are specialists in Policies, Procedures, Internal Controls and Financial Reporting.  We help accounting departments run “better, faster, cheaper,” and Boards of Directors/senior managements insure that they are performing their fiduciary duties at the highest possible level.  We are happy to answer any questions.  Contact us at info@NPAccountants.org or 617 694 4600.