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Expert: Leo Lingham Date: 6/18/2008 Subject: Accounting and finance for managers
Question Sir this is my question:
"Accounting is closely connected with control." Elaborate this statement and discuss the role of accounting feedback in the process of control.
Answer SHWETHA,
HERE IS SOME USEFUL MATERIALS.
REGARDS
LEO LINGHAM
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THE CONTROLS FOR ANY ORGANIZATION ARE THE FOLLOWING
-EFFECTIVE ORGANIZATION STRUCTURE
-MANAGEMENT CONTROLS AT ALL LEVELS, WHICH INCLUDES
*MARKETING MANAGEMENT
*SALES MANAGEMENT
*SUPPLY MANAGEMENT
*DISTRIBUTION MANAGEMENT
ETC ETC
THESE CONTROLS ARE ,
-BUDGETORY CONTROLS
-AUTHORIZATIONS CONTROLS
-INVENTORY CONTROLS--RAW MATERIALS
-INVENTORY CONTROLS --FINISHED PRODUCTS
-QUALITY CONTROLS
-PROCUREMENT CONTROLS
-DEBT CONTROLS
-SALES/ MARKETING EXPENSES CONTROL
-PERSONNEL CONTROL
-MONTHLY PERFORMANCE REVIEW AGAINST BUDGET
-HALF YEARLY BUSINESS AUDITING
IN ALL ORGANIZATIONS , WE HAVE INTEGRATED THE CONTROL
SYSTEMS INTO PLANNING, SO THAT IT HELPS
-TO MEASURE THE DEVIATIONS
-TO STUDY THE VARIANCES
-TO TAKE APPROPRIATE ACTIONS.
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Management planning and control process"
P .PLANNING-----------------C.CONTROL [ c1.establish standards]
p1.establishing objectives.[FINANCIAL from accounts]
p2.determine detailed activities.
p3.delegation
p4.schedule tasks
p5.allocate resources
p6.communication and coordination
p7.provide incentives
c2.measure and compare.[ ACTUAL FINANCIAL RESULTS from accounts]
c3.evaluate results.
c4.feedback and coach
c5.take corrective action.
The above schematic shows the important interrelationships between planning and control. As you can see, the control process does not begin after the entire planning process ends, as most managers believe.
After objectives are set in the first step of the planning process, appropriate standards should be developed for them. Standards are units of measurement established to serve as a reference base and are useful in determining time lines, sequences of activities, scheduling, and allocation of resources.
For example, if objectives are set and work is planned for 18 people on an assembly line, standards or reasonable expectations of performance from each person then need to be clearly established.
The second significant interaction between planning and control occurs with the final step of the control process-taking corrective action. This can take several forms, but two of the most effective are to change the objectives or alter the plan.
Managers dislike doing either; but if a positive motivational climate is to be established, these ought to be the first two corrective actions attempted. Objectives and standards are based on assumptions, but if these assumptions prove inaccurate, then objectives and standards require alteration. Thus sales quotas assigned on the premise of a booming economy can certainly be altered if, as is often the case, the economy turns sour.
Likewise, if the assumptions are accurate and objectives and standards have not been met, then it is possible that the plan developed was inadequate and needs to be changed.
IN ALL THESE, THE INFORMATION FOR CONTROL
IS PROVIDED FROM THE OPERATIONAL ACCOUNTS.
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Controls are to be an integral part of any organization's financial and business policies and procedures. Controls consists of all the measures taken by the organization for the purpose of; (1) protecting its resources against waste, fraud, and inefficiency; (2) ensuring accuracy and reliability in accounting and operating data; (3) securing compliance with the policies of the organization; and (4) evaluating the level of performance in all organizational units of the organization. Controls are simply good business practices.
1.Responsibility
Everyone within the COMPANY has some role in controls. The roles vary depending upon the level of responsibility and the nature of involvement by the individual. The Board of President and senior executives establish the presence of integrity, ethics, competence and a positive control environment. The department heads have oversight responsibility for controls within their units. Managers and supervisory personnel are responsible for executing control policies and procedures at the detail level within their specific unit. Each individual within a unit is to be cognizant of proper internal control procedures associated with their specific job responsibilities.
The Internal Audit role is to examine the adequacy and effectiveness of the company internal controls and make recommendations where control improvements are needed. Since Internal Auditing is to remain independent and objective, the Internal Audit Office does not have the primary responsibility for establishing or maintaining internal controls. However, the effectiveness of the internal controls are enhanced through the reviews performed and recommendations made by Internal Auditing.
2.Elements of Internal Control
Internal control systems operate at different levels of effectiveness. Determining whether a particular internal control system is effective is a judgement resulting from an assessment of whether the five components - Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring - are present and functioning. Effective controls provide reasonable assurance regarding the accomplishment of established objectives.
**A. Control Environment
The control environment, as established by the organization's administration, sets the tone of THE COMPANY and influences the control consciousness of its people. MANAGERS of each department, area or activity establish a local control environment. This is the foundation for all other components of internal control, providing discipline and structure. Control environment factors include:
Integrity and ethical values;
The commitment to competence;
Leadership philosophy and operating style;
The way management assigns authority and responsibility, and organizes and develops its people;
Policies and procedures.
**B. Risk Assessment
Every entity faces a variety of risks from external and internal sources that must be assessed. A precondition to risk assessment is establishment of objectives, linked at different levels and internally consistent. Risk assessment is the identification and analysis of relevant risks to achievement of the objectives, forming a basis for determining how the risks should be managed. Because economics, regulatory and operating conditions will continue to change, mechanisms are needed to identify and deal with the special risks associated with change.
Objectives must be established before MANAGERS can identify and take necessary steps to manage risks. Operations objectives relate to effectiveness and efficiency of the operations, including performance and financial goals and safeguarding resources against loss. Financial reporting objectives pertain to the preparation of reliable published financial statements, including prevention of fraudulent financial reporting. Compliance objectives pertain to laws and regulations which establish minimum standards of behavior.
The process of identifying and analyzing risk is an ongoing process and is a critical component of an effective internal control system. Attention must be focused on risks at all levels and necessary actions must be taken to manage. Risks can pertain to internal and external factors. After risks have been identified they must be evaluated.
Managing change requires a constant assessment of risk and the impact on internal controls. Economic, industry and regulatory environments change and entities' activities evolve. Mechanisms are needed to identify and react to changing conditions.
**C. Control Activities
Control activities are the policies and procedures that help ensure management directives are carried out. They help ensure that necessary actions are taken to address risks to achievement of the entity's objectives. Control activities occur throughout the organization, at all levels, and in all functions. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties.
Control activities usually involve two elements: a policy establishing what should be done and procedures to effect the policy. All policies must be implemented thoughtfully, conscientiously and consistently.
**D.Information and Communication
Pertinent information must be identified, captured and communicated in a form and time frame that enables people to carry out their responsibilities. Effective communication must occur in a broad sense, flowing down, across and up the organization. All personnel must receive a clear message from top management that control responsibilities must be taken seriously. They must understand their own role in the internal control system, as well as how individual activities relate to the work of others. They must have a means of communicating significant information upstream.
**E.Monitoring
Control systems need to be monitored - a process that assesses the quality of the system's performance over time. Ongoing monitoring occurs in the ordinary course of operations, and includes regular management and supervisory activities, and other actions personnel take in performing their duties that assess the quality of internal control system performance.
The scope and frequency of separate evaluations depend primarily on an assessment of risks and the effectiveness of ongoing monitoring procedures. Internal control deficiencies should be reported upstream, with serious matters reported immediately to top administration and governing boards.
Control systems change over time. The way controls are applied may evolve. Once effective procedures can become less effective due to the arrival of new personnel, varying effectiveness of training and supervision, time and resources constraints, or additional pressures. Furthermore, circumstances for which the internal control system was originally designed also may change. Because of changing conditions, management needs to determine whether the internal control system continues to be relevant and able to address new risks.
***Components of the Control Activity
1.Internal controls rely on the principle of checks and balances in the workplace. The following components focus on the control activity:
2.Personnel need to be competent and trustworthy, with clearly established lines of authority and responsibility documented in written job descriptions and procedures manuals. Organizational charts provide a visual presentation of lines of authority and periodic updates of job descriptions ensures that employees are aware of the duties they are expected to perform.
3.Authorization Procedures need to include a thorough review of supporting information to verify the propriety and validity of transactions. Approval authority is to be commensurate with the nature and significance of the transactions and in compliance with COMPANY policy.
4.Segregation of Duties reduce the likelihood of errors and irregularities. An individual is not to have responsibility for more than one of the three transaction components: authorization, custody, and record keeping. When the work of one employee is checked by another, and when the responsibility for custody for assets is separate from the responsibility for maintaining the records relating to those assets, there is appropriate segregation of duties. This helps detect errors in a timely manner and deter improper activities; and at the same time, it should be devised to prompt operational efficiency and allow for effective communications.
5.Physical Restrictions are the most important type of protective measures for safeguarding COMPANY assets, processes and data.
6.Documentation and Record Retention is to provide reasonable assurance that all information and transactions of value are accurately recorded and retained. Records are to be maintained and controlled in accordance with the established retention period and properly disposed of in accordance with established procedures.
7.Monitoring Operations is essential to verify that controls are operating properly. Reconciliations, confirmations, and exception reports can provide this type of information.
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Internal accounting control is a series of procedures designed to promote and protect sound management practices, both general and financial. Following internal accounting control procedures will significantly increase the likelihood that:
financial information is reliable, so that managers and the board can depend on accurate information to make programmatic AND other decisions
assets and records of the organization are not stolen, misused, or accidentally destroyed
the organization s policies are followed
government regulations are met.
Developing an Internal Accounting Control System
The first step in developing an effective internal accounting control system is to identify those areas where abuses or errors are likely to occur. A Guide for Management, includes the following areas and objectives in developing an effective internal accounting control system:
Cash receipts
To ensure that all cash intended for the organization is received, promptly deposited, properly recorded, reconciled, and kept under adequate security.
Cash disbursements
To ensure that cash is disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded.
Petty cash
To ensure that petty cash and other working funds are disbursed only for proper purposes, are adequately safeguarded, and properly recorded.
Payroll
To ensure that payroll disbursements are made only upon proper authorization to bona fide employees, that payroll disbursements are properly recorded and that related legal requirements (such as payroll tax deposits) are complied with.
Grants, gifts, and bequests
To ensure that all grants, gifts, and bequests are received and properly recorded, and that compliance with the terms of any related restrictions is adequately monitored.
Fixed assets
To ensure that fixed assets are acquired and disposed of only upon proper authorization, are adequately safeguarded, and properly recorded.
Additional internal controls are also required to ensure proper recording of SALES and other revenues, accurate, timely financial reports and information returns, and compliance with other government regulations.
Achieving these objectives requires your organization to clearly state procedures for handling each area, including a system of checks and balances in which no financial transaction is handled by only one person from beginning to end. This principle, called segregation of duties, is central to an effective internal controls system. Even in a small nonprofit, duties can be divided up between paid staff and volunteers to reduce the opportunity for error and wrongdoing. For example, in a small organization, the director might approve payments and sign checks prepared by the bookkeeper or office manager. The board treasurer might then review disbursements with accompanying documentation each month, prepare the bank reconciliation, and review canceled checks.
The board and executive director share the responsibility for setting a tone and standard of accountability and conscientiousness regarding the organization's assets and responsibilities. The board, usually through the work of the finance committee, fulfills that responsibility in part by approving many aspects of the internal control accounting system. Common areas requiring board attention include:
Check issuance
The number of signatures on checks, dollar amounts which require board approval or board signature on the check, who authorizes payments and financial commitments, etc.
Deposits
How payments made in cash (for admissions, raffles, weekly collection plate, etc.) will be handled, etc.
Transfers
If and when the general fund can borrow from restricted funds, etc.
Approval of plans and commitments before they are implemented
The annual budget and periodic comparisons of financial statements with budgeted amounts, leases, loan agreements, and other major commitments.
Personnel policies
Salary levels, vacation, overtime, compensatory time, benefits, grievance procedures, severance pay, evaluation, and other personnel matters.
The Accounting Procedures Manual
The policies and procedures for handling financial transactions are best recorded in an Accounting Procedures Manual, describing the administrative tasks and who is responsible for each. The manual does not have to be a formal document, but rather a simple description of how functions such as paying bills, depositing cash, and transferring money between funds are handled. As you start to document these procedures, even in simple memo form, the memos themselves can be kept together to form a very basic Accounting Procedures Manual. Writing or revising an Accounting Procedures Manual is a good opportunity to see whether adequate controls are in place. In addition, having such a manual facilitates smooth turnover in financial staff.
Maintaining Effective Controls
The FINANCE/ACCOUNTING director is commonly responsible for overseeing the day-to-day implementation of these policies and procedures.
The auditor's management letter is an important indicator of the adequacy of your internal accounting control structure, and the degree to which it is maintained. The management letter, which accompanies the audit and is typically addressed to the board as trustees for the organization, cites significant weaknesses in the system or its execution. By reviewing the management letter with the executive director, asking for responses to each internal control lapse or recommendation, and comparing management letters from year to year, the board has a useful mechanism for monitoring its financial safeguards and adherence to financial policies.
As your profit changes and matures, and your funding and programs change, you will need to periodically review the internal accounting control system which you have established and modify it to include new circumstances (bigger staff, more restricted funding, etc.) and regulations (such as receiving federal awards with increased compliance demands.)
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Internal Controls Simplified
ACCOUNTING INFORMATIONS USED AS CONTROLS:
CASH
-Control Cash Drawers And Credit Cards
-Control Cash Receipts And Deposits
-control system to Manage Problem Checks
-control system to Manage Wire Transfers
-Control to Cheque Signing Authority
-control system to Manage Check Requests
-control system to Manage Bank Account Reconciliations
-control system to Manage Petty Cash
GENERAL & ADMINISTRATIVE
-control system Manage Chart of Accounts
-system to Control Files And Records Management
-control system to Manage Travel And Entertainment
-system to Control Management Reports
-system to Control Period-End Review & Closing
-control system to Manage Controlling Legal Costs
-control system to Manage Taxes And Insurance
-system to Control Property Tax Assessments
-control system to Manage Confidential Information Release
-system to Control Documents
INVENTORY & ASSETS
CONTROL SYSTEMS
-to Manage Inventory Control
-to Manage Inventory Counts
-to Manage Fixed Asset Control
-to Manage Customer Property
-to Control Fixed Asset Capitalization & Depreciation
PURCHASING
CONTROL SYSTEMS
-to Control Vendor Selection
-to Manage General Purchasing
-to Manage Project Purchasing
-to Control Receiving And Inspection
-to Manage Shipping And Freight Claims
-to Control Accounts Payable And Cash Disbursements
REVENUE
CONTROL SYSTEMS
-to Control Point-Of-Sale Orders
-to Manage Sales Order Entry
-to Manage Sales Order Acceptance
-to Control Customer Credit Approval And Terms
-to Manage Shipment Of Goods
-to Control Invoicing And Accounts Receivable
-to Manage Progress Billing
-to Manage Sales Tax Collection
-to Manage Account Collections
-to Control Customer Returns
SALES MANAGEMENT
CONTROL SYSTEMS
-total sales expenses
-territory sales expenses
etc etc
MARKETING MANAGEMENT
CONTROL SYSTEMS
-product development costs
-advertising expenses
-sales promotion expenses
-trade promotion expenses
-trade spend expenses
etc etc
Accounting Forms applied to the
CONTROL SYSTEMS.
-Sample Account Codes
-Account Collection Control Form
-Accounts Receivable Write-Off Authorization
-Asset Disposition Form
-Bad Check Notice
-Bank Wire Instructions
-Bill Of Sale
-Budget vs. Actual Report
-Capital Asset Requisition
-Check Request
-Check Signing Authority Log
-Commercial Invoice
-Credit Application
-Credit Inquiry
-Daily Cash Report
-Daily Flash Report
-Daily Sundry Payable Log
-Department Reporting Summary
-Deposit Log
-Document Change Control
-Entertainment And Business Gift Expense Report
-Financial Statements
-Inventory Count Sheet
-Inventory Inspection Levels
-Inventory Requisition
-Inventory Tag
-Sample Invoice
-Master File Guide Index
-Material Return Notice
-New Vendor Notification
-Non-Disclosure Agreement
-Order And Arrival Log
-Order Form
-Phone Confirmation Checklist
-Purchase Order
-Purchase Order Follow-Up
-Purchase Order Log
-Purchase Requisition
-Receiving and Inspection Report
-Receiving Log
-Records Retention Periods
-Request For Credit Approval
-Request For Document Change
-Returned Goods Authorization
-Sample Sales Order
-Sample Bank And Book Balances Reconciliation
-Shipping Log
-Tax Calendar of Recurring Monthly Dates
-Travel And Miscellaneous Expense Report
-Travel Arrangements Form
-Vendor Survey Form
-Week Cash Flow Report
-Weekly Financial Report
-Wire Transfer Form
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