The Negative Impact of Policies (#313)

In this podcast episode, we discuss why you should minimize the number of accounting policies.

The accounting department issues a lot of policies, which are designed to provide some structure to how things are done within a business. The problem is that policies only work within a certain range of activities. Outside of that range, it would be better if you had no policy at all. Or, policies are designed to deal with a specific issue, but they have a negative impact elsewhere.

Examples of Excessive Policy Usage

For example. You think it’s a good idea to shift responsibility for collections among your collections people every couple of years, so that your collections staff doesn’t get too attached to the customers their assigned to. So you write up a policy to switch customer assignments every two years. What does this do? It will fix the problem you’re focusing on, but it will also make the collections people less efficient, because they have to learn about a new set of customers every two years. Maybe a better approach would be to informally monitor collection rates and make incremental adjustments if a collections person seems to be giving a few customers an excessive amount of slack in making payments.

Here’s another one, which relates to cash receipts. It may not be obvious where to apply cash received from some customers, so it’s recorded in a pending account, until you can figure it out. Some of these funds might stay unidentified for a long time, so you create a policy to review everything in the account every day. The intention is good, which is to minimize the unidentified amount of cash. But is creating a policy for it actually a good idea? If your cash receipts people are forced to review the account every single day, this is taking time away from other activities, such as helping to close the books at the end of the month. In short, issuing the policy elevates the importance of a task that isn’t really all that important. It might make more sense to spread out the policy requirement, and maybe enforce a review once a month.

Let’s move over to the accounts payable area for another example. You’re concerned about the risk of making a duplicate payment, because the invoice you have is a copy, not the original. This situation comes up when the original invoice is lost in transit, so the supplier sends a copy. To minimize the risk of a duplicate payment, you institute a policy that the responsible department manager has to personally sign off on all invoice copies. Is this a good idea? What if the invoice is for some minor amount, like $100? Someone from the accounting department will have to walk this piddling invoice over to the department manager, who then has to break away from more important work to sign off on the invoice. For invoices of this size, a better approach might be to just accept the risk of a duplicate payment, and not bother the department managers. This means that the policy might be restructured to only require a personal approval if the amount exceeds, say, $5,000.

And let’s finish with one that annoys everybody outside of the accounting department. The policy to require substantiation in an expense report whenever you want reimbursement for something paid for with cash. This is really annoying for employees, because they have to remember to ask for a receipt all the time, and if they don’t get a receipt, then they don’t get reimbursed.

Does it really make sense to impose a policy for this? Maybe for larger cash expenditures, but requiring it for everything just pisses people off.

When to Create a Policy

So what can be done? First of all, think long and hard before you create a new policy, because it could do more harm than good. It could make more sense to avoid having a policy at all, if only to maintain some flexibility in how you handle processes. If you decide that it really is necessary to issue a policy, then think about all possible ramifications, and structure the policy to deal with those outlier events that will be harmed by the policy.

And in particular, decide whether you really want to impose a policy in reaction to something that happened just once. If you keep devising policies to counteract one-time events, what you’re really doing is creating a hidebound, crusty organization that doesn’t allow its people to do anything. Instead, everything is ruled by a policies and procedures manual.

Related Courses

The Accounting Controls Guidebook

The Accounting Procedures Guidebook