Making Accounting Decisions (#312)

In this episode, we discuss the process steps for making the right decisions in the accounting department.

How to Resolve Operational Challenges

The topic of this episode comes from a listener, and it is, how should professionals go about researching to resolve operational challenges. Your responses always seem so frustratingly cogent and to the point.

Annoying, isn’t it? It might help to keep in mind that I’ve been writing about accounting topics for 30 years, which is more than 10 million words about accounting. Which means that somewhere in those Word files is the answer to pretty much everything. But in cases where someone has a question that I’ve not run across before, I use trail running and mountain biking to come up with lots of ideas.

I read through a listener’s question, and then hit the trails for a few hours, and let the ideas bounce around. If it’s a tough question, it might take a couple of weeks to find the nugget of information that really drills down to the core issue.

The longest time I ever took to formulate a podcast episode was three months, and that was for episode 300, which was what to do with the rest of your time. I’ve also gotten the most positive responses from that one episode, which suggests that taking more time results in better decisions.

Example of Decision-Making

So, that’s what I do. What can you do? Let’s work through this with an example. You’re a company controller, and a department manager comes to you with a request to set up a petty cash box in his area, so he can take care of minor cash requests.

You know that petty cash boxes are a pain, because the cash is easily stolen, so all kinds of controls have to be put in place. You read through my books, and decide to take my recommendation that petty cash is bad, and that you won’t allow the request. Okay, that was step one, which was a search for outside information. Are you done? No.

You’re just making a decision based on the general principle that petty cash is bad. Is it really? In your specific circumstances?

Well, the only way to find out is to do some research out in the wild. Which means talking to your in-house expert, which is the custodian for whichever petty cash boxes the company already has.

Let’s say his name is Fred. You go to Fred and tell him that you’re thinking about banning petty cash boxes in such-and-such a department. What does he think? Keep in mind, he is the expert and you’re not, so shut up and listen. This is where accounting managers usually screw up, because they think they know everything, and they don’t. Your staff knows how accounting processes actually work, so rely on them.

Fred points out five different cases where it really does make sense to have some cash on hand to pay for immediate items. Let’s use just one, which is that the president likes to order flowers, which are delivered for the birthday of every office worker. The charge is $50, which the delivery person collects in cash. You call up the florist and ask if the company can set up an account with them, and just pay the bill once a month. Problem solved.

If – and only if – you can find solutions like that for all petty cash issues, then you have an actual case for getting rid of petty cash. Then go back to the department manager who wanted a petty cash box, ask specifically why the box is needed, and do the same thing – run through your alternatives for how not to have a petty cash box. If you can’t do that, then by default that department manager should get his petty cash box – irrespective of what I or anybody else might say about why petty cash boxes are a bad idea.

Which brings me to an uncomfortable truth for any accountant to consider. What does an accountant do? Let me quote my own website. Accounting is a system of record keeping that records transactions and aggregates the resulting information into a set of financial reports. Is that what anyone else in the company would tell you is the definition of accounting? I don’t think so.

They will say, in lots of pungent variations, that accounting is the sand in the corporate gearbox. We are the ones who get in the way of the business of the organization. We are the ones who reimburse expense reports late. And so on. There’s a reason why the Dilbert cartoon series portrays accountants as trolls in a cave. Sure, Scott Adams was going to an extreme to be funny, but that’s generally the view of the accounting department by everyone else.

Which means that your final step is to adopt the solution that best helps the rest of the company. Even if it’s not the most efficient one for the accounting department.

So let’s get back to the original question, which was how to research to resolve operational challenges. Step one, find a solution being used elsewhere. Step two, consult your own staff – or whoever is the in-house expert – to see if it will work. Step three, see if your solution needs to be modified to fit the local circumstances. And step four, make sure that the outcome helps the rest of the business. Only by helping everyone else will we be viewed as humans, and not trolls.

Managing Controls

That covers the question, but I’m going to slide over and also address the subject of controls. Because these are the real sand in the gearbox. As a general rule, adding controls slows down company operations, because you’re introducing non-value-added activities.

Logically, then, to avoid being labeled as accounting trolls, it would make sense to schedule an annual review of your control systems, to see if anything can be removed or at least streamlined. The funny thing is, the outside auditors will usually slam you for removing controls, because their focus is on risk reduction, not being cost-effective.

Have you ever wondered why the auditors are always so determined to force you to add controls? To do that, you need to drill all the way down to the baseline motivations of an outside audit firm – which means looking at the criteria used to promote auditors to the partner position. You’re not promoted if you’re the best audit manager, or the one with the most exquisite knowledge of accounting standards.

Auditors are promoted to partner for one reason only, which is their ability to bring in new business. But, what kind of new business? The profitable kind. And what kind is that? It’s the largest and most stable clients with the lowest risk of producing incorrect financial statements. You see, the risk of producing incorrect financial statements directly impacts the profits of an audit firm, because the firm can be sued for putting its stamp of approval on financial statements that turn out to be wrong, which means there’ll be an insurance payout to the plaintiff, which means that the audit firm’s insurance premiums go up, which means that the profits paid out to the partners go down.

That was a long-winded way of saying that audit partners want to increase their personal income, and they do that by lowering their risk, which means forcing their clients to install every possible control.

This puts a company controller or CFO in the odd position of constantly having to push back against the auditors to not install an excessive number of controls, because they’re trying to keep the company efficient. In short, the goals of the auditors conflict with the goals of the company, which causes trouble for the accounting department, which is caught in between.

My advice is, support the operational efficiency of the business by only installing cost-effective controls, even if it means being in conflict with the auditors all the time.

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