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  • Laresa McIntyre, CMA, MBA
    Senior Finance Executive ~
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Safeguarding Financial Resources: Issues in HR

As finance & accounting professionals, one of our primary roles is to safeguard the financial resources of the company for which we work.  This is accomplished through the controls we have within finance & accounting processes, and the analysis we do to identify anomalies in financial results.  Safeguarding financial resources also means understanding the potential risks that exist within the company’s operations that would have a financial impact, and mitigating those risks where possible.  It is important for a good financial leader to have a grasp of the entire company’s workings in every department because of this very reason.  Human resources is one area that needs to be on the radar screen when understanding potential risks.  Even in this day and age of automation, salaries & wages still comprise a large expenditure for the majority of businesses.

The U.S. Department of Labor as of late has been taking a more active role in investigating companies with potential violations in employment practices.  The DOL has been increasing the number of investigators on staff to support these efforts.  It is imperative for companies to  ensure they are in compliance with labor laws to avoid hefty fines or lawsuits.  Although there are a multitude of laws surrounding labor practices, I would like to address two areas in particular in today’s post:  classification of employees as exempt or non-exempt and proper timekeeping.

Exempt vs. Non-Exempt Employees

Just to make sure we’re on the same page, because I know people who get this mixed up, exempt employees are not paid overtime.  The determination of exempt vs. non-exempt lies in how an employee performs their job.  It is NOT dependent on their title so don’t think every person you call a “manager” is automatically an exempt employee.  This is why there should be a written job description for every position and modified job descriptions for each individual in a particular position if there are significant differences from the base position.  Exempt employees usually have autonomy in determining how their job is done and work whatever hours are necessary to accomplish the deliverables of their position.  These are usually employees that are paid a salary and have managerial, administrative or supervisory roles, or are professionals.  However, sometimes there can be a gray area in classifying employees.  Whenever there is a doubt about which way a position should be classified, seek the advice of an employment law attorney.  It may cost a little but it will help you decide what side of the line to walk on and determine what risks you are taking.

Timekeeping

Disputes over time paid, especially if an employee is contesting their exempt status, can be a huge headache for a business.  This is why having good timekeeping systems and procedures are essential.  When these cases are brought to the DOL or the courts, the assumption is the employee is right.  After all, who would know better how many hours they worked than the employee themselves.  These are usually civil cases so there is no “presumption of innocence” — it is based upon the preponderance of evidence.  This simply means that if the evidence was stacked up side-by-side, what side does it favor?  Any ambiguity will usually favor the weaker party, in this case the employee, because it is accepted that the company had greater control to write and implement the terms of employment.  Because of this, a lax timekeeping system will sink you every time.  When considering your timekeeping, there are so many situations you need to consider like “buddy punching” and how missed punches are handled.  Another consideration is cost — not every business will be able to afford the gold standard of a biometric system.  The important thing is to have a system and to make it the best system it can be to mitigate risk.

Now some of you might be saying these are issues for the Human Resources department to handle and I agree the legwork to ensure these issues are addressed lies with them.  However, if the company’s practices are found to violate legislation, and it faces large fines and payouts because of it, I can guarantee senior management will call both HR and Finance onto the carpet for an explanation.  After all, we’re supposed to be safeguarding the financial resources of the company.  And whether we like it or not, if we turn a blind eye to what is happening around us and stay strictly focused on “getting the books right” and reporting the numbers, we aren’t doing the job we were hired to do.  If you do nothing else, at least ask the questions to make sure the issues are being looked at and addressed.

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10 Best Practices for Accounts Payable

Here are 10 best practices for accounts payable in no particular order.  Hopefully your A/P department can put a check beside each of these items.

1. Always pay from original invoices.  If you have to pay from a copy, be sure to check your records for the same invoice number and dollar amount.

2. Before paying any vendor, be sure there is a W-9 on file for them. This will save a lot of hassle at year-end when you need to prepare 1099s.  Fines for not complying with 1099 reporting requirements can be hefty.  Also, there is proposed legislation working its way through Congress and the Senate that would require businesses to issue 1099s for anyone paid over $600 INCLUDING corporations.  Be sure to watch this one — HR3408, The Taxpayer Responsibility, Accountability and Consistency Act of 2009.

3.  Ensure you have a policy about how invoice numbers are to be entered.  If you have a number of clerks all using their own rules about entering invoice numbers (like what to do with leading zeros), it will be difficult to track down anything.  Also, having a policy helps if there isn’t an invoice number.

4.  The person entering the invoice should be different from the person approving the invoice who should be different from the person signing the check.

5.  Have all invoices come to the accounting department first before being sent out for approval(s).  This way the invoice can be logged before it enters the black hole.

6.   Do not enter invoices as a batch.  Each one should be entered individually in order to have an audit trail.

7.  All invoices should have the account coding written on them as well as any notes about special handling.

8.  The amount of the invoice should be entered as billed even if you don’t plan on paying the full amount.  A credit memo can be entered and matched against the invoice later.  The key is to remember the audit trail.

9.  Have a new vendor welcome letter that you can send informing them of where invoices should be sent, what information you require to process their invoices (like a vendor ID number) and any forms you need completed.  Vendors will appreciate the information to ensure their payments aren’t held up.

10.  Watch your payables carefully to take advantage of any discounts being offered by vendors.  It can add up to a nice sum by the end of the year.

Reporting Periods: Why 13 Might Be Lucky

We in the finance & accounting field can be creatures of habit.  We get used to looking at things in terms of months.  This is how we are schooled and how most companies set up their books.  The problem is reporting on a monthly basis can make analyzing trends and making comparisons between periods difficult because we aren’t dealing with periods of equal length.  So let’s consider the 4-week accounting period – 13 in each year.

I started giving this thought in the past few weeks.  Having periods of equal length with four Mondays, four Tuesdays, four Wednesdays and so on can really be beneficial.  Restaurant chains and retail stores will often use this reporting structure because most holidays will fall in the same period every single year making comparisons more meaningful.  The benefits are even greater if your pay schedule is bi-weekly.  Just think – you may not need to do payroll accruals!!  There is also an advantage related to inventory as scheduling & planning counts becomes easier because they will always fall on the same day of the week.

Going to a 4-week reporting cycle isn’t without its challenges.  First, for those of you who noticed, 13 periods X 4 weeks X 7 days per week = 364 days.  We all know there are 365 days in a year.  So your year end will change by 1 day each year.  There are two ways to handle this:

  1. If you want to always have your periods start on a particular weekday, it would probably be wise to add one extra week to the fiscal year every 6 years to align it back with your “normal” fiscal year end.  An example of this calendar can be seen here:   13-period calendar starting on Sunday
  2. If you aren’t overly particular about the day the period starts on, you could assign the first day of the fiscal year to always be an extra day in Period 1.  You will also need to assign any leap days (Feb. 29) as an extra day in the period that Feb. 28th falls.  In this scenario, the same dates will always be in the same periods.  An example of this calendar can be seen here:  13-period calendar starting on Jan. 2

Here are some other things that might appear to be challenges:

  • Bank statements are usually done on a monthly basis but this can usually be overcome by asking your bank to cut off your statement dates according to your schedule.  And honestly, who isn’t using electronic downloads from their bank account anyway to do bank reconciliations?  This objection to the 4-week reporting cycle is not a show stopper.
  • Some expenses are billed on a monthly basis.  Handling this one does require a little bit of work on the part of the accounting staff but when you consider the potential benefits in reporting, it might be worthwhile.  Let’s take rent, for example.  Let’s say your rent for the year is $120,000.  When you receive your monthly bill for $10,000, code it to a prepaid account and expense $9,230.77 per period (1/13th of the yearly total).  By the end of the year, the entire amount will have been expensed equally amongst the periods and the prepaid account balance will be zero.
  • I know that some software packages like QuickBooks have their canned reports built on a monthly reporting schedule.  In QuickBooks, this is easily taken care of by creating memorized reports with the appropriate date ranges corresponding to the period.  There is probably a workaround in most systems if they don’t accommodate the 4-week reporting cycle.

Although using a 4-week reporting cycle may not be for every business, the above discussion will hopefully allow you to weigh the pros and cons and determine if it’s right for your company.

New posts coming next week

Apologies for the short hiatus of The Finance Compass. I started a new job last week and it’s been a bit hectic!! But new posts will be in this space next week so be sure to be on the lookout for them.

Don’t Risk Your Data — Assess It

Disgruntled employees, hackers, incompetent personnel and competitors engaged in corporate espionage are all concerns for a business.  Even more concerning is what they can do to your data.  Theft, corruption, errors or complete data loss are reason enough to possibly lose some sleep at night.  This is why every business must be cognizant of the potential risks to their information.  This doesn’t just refer to financial data but also key information needed to continue being a viable entity.  Customer lists, proprietary information about products or services, and contracts that give the business a competitive advantage all fall within this group.  In order to ensure that data is safe, an information security risk assessment should be conducted at least on an annual basis.

Even before a risk assessment is conducted, the business will need to determine a set of baseline standards related to data security that it should meet.  These standards will look at things like access rights, password protocols, physical controls over equipment, policies and procedures for the business and many other items.  Once these standards are set, then the risk assessment should look at the following areas:

  • What information sources does the business have and what information comes from those sources?
  • How sensitive is each data source? Does it contain information that if breached would become a legal issue (like credit card information or employee data)?  Is it commercially important to the business?  Or is it just “run of the mill” information that if disclosed would not cause any harm?
  • What would be the business impact if the data source was compromised, lost or stolen?
  • What is the level of threat and degree of vulnerability to each data source from internal attacks, external attacks, system malfunctions, process changes or regulatory requirements?
  • What is the likelihood of an incident in each of these areas occurring?
  • What are the specific risks in each of these areas that can be identified?

On the surface, this might seem a daunting task but if you assess the top four or five data sources for the business, this will usually flush out most of the major issues.

This process is usually driven by the Internal Audit department but if your company doesn’t have one, it may be the responsibility of ensuring the assessment is done will fall to the finance & accounting department.  However, this doesn’t mean you should be the only ones involved in the assessment.  Getting input from all functional areas of the company is important.  Also, this isn’t and shouldn’t be an exercise conducted by the IT department alone.  Although our friends in IT are usually on top of what’s happening in the business from a data perspective, this assessment is more than just making sure password protocols and firewalls are in place.  The assessment speaks to the entire business process and should be treated as such.

There is also another very good reason to involve others.  It is important to get consensus from within the business about what data is most vital to ongoing operations.  Everyone thinks their information is important but in the big picture, some data sources will be heads and shoulders above the rest.  These are the data sources that need to be examined with a critical eye and it makes the process easier when everyone has agreed to this.

As the risk assessment is completed, it will highlight areas of concern and a list of things to be done to improve data security will result.  Some of these things will be IT-related but the list may also include efforts by the HR department to write up policies and update employee handbooks, or require department managers to educate their employees about new procedures.  By considering the analysis on data sensitivity, business impact, threat and vulnerability, and likelihood, this list can be prioritized to drive the work to the biggest issues first.  The end result is hopefully more secure data and a few less sleepless nights.

FIN 48: Accounting for Uncertainty in Income Taxes

Today’s post is a guest post from a colleague of mine.  His name is William Crozier and he has over sixteen years of experience dealing with tax issues including their proper financial reporting.  William has his own consulting practice providing temporary tax function management, support and advisory services.

The time has finally come for private companies that issue GAAP financials to implement FIN 48 – Accounting for Uncertainty in Income Taxes.

On July 13, 2006, the FASB issued FIN 48, the most significant change to accounting for income taxes since the adoption of the liability reporting method or FAS 109.  The purpose of FIN 48 is to clarify the recognition of uncertainty by establishing a minimum threshold a tax position is required to meet before being recognized in the company’s financial statements.  FIN 48 applies to taxes covered by FAS 109 for regular for-profit organizations, pass-through entities such as partnerships, non-taxable entities, REITs and other registered investment companies.

Recognition under FIN 48 works based on a two-step process of recognition and measurement.  Recognition occurs when a tax position, based on its technical merits, is more likely than not to occur.  The amount recognized or measured will be the largest amount of benefit or liability that is more likely than not to be realized upon ultimate settlement, determined on a cumulative probability basis.

The recognition now required under FIN 48 clarifies the recognition and measurement previously done under FAS 5. The most intrusive or disheartening aspect of FIN 48 is its new disclosure requirements.  The new rules now require a tabular roll forward of the beginning and ending aggregate unrecognized tax benefits plus the specific detail related to tax uncertainties for which it is reasonably possible that an amount of unrecognized tax benefit will significantly increase or decrease within twelve months.  The “rub” comes from the fact that work product previously protected by client-attorney privilege could lose its protection since it will now have to be revived by outside auditors in support of reporting under FIN 48.  The Internal Revenue Service has had a “Gentlemen’s Agreement” that they would not automatically request FIN 48 work papers but has reserved the right to do so on an individual basis.  One such request is currently working its way through the courts.

So, what does this mean?

As with any new pronouncement from FASB, it means a lot of work.  The first thing you will want to do, if you haven’t done so already, is to meet with your outside auditors as soon as possible to scope out document requests and plan their review.  A proper FIN 48 review will look at every issue, no matter if it is questionable or not.  For example, if you have a subsidiary that pays a tax-free dividend to its parent every year, as part of your FIN 48 review process, you will have to document its proper tax treatment even though it is established law.  To give the reader an idea of the possible documentation needs, a recent FIN 48 review that I was involved with for a medium-sized multinational company consisted of about eight medium sized three-ring binders.

What Marathon Training & Business Share in Common

Over the past 4 years, I have completed 4 marathons and when I stopped to think about the effort required to train for one, it occurred to me there are many parallels to the effort expended in starting and running a business.

Deciding To Do It

Whether you want to run a marathon or start a business, at some point in time you make the decision to do it.  Each person’s motivation may be different but the end result is making the commitment to proceed.

Making a Plan

Planning is probably the most important part of the entire process because it provides the roadmap to success.  For a marathon runner it includes picking a race, putting together a training schedule, deciding if you want a coach or not and seeking one out if you want one, getting the right shoes and clothes, and finding running routes where you can train.  It’s not so different for a business.  The business plan includes setting goals and objectives, finding a mentor or advisor if you want one, buying the equipment you’ll need to run the business, setting out a marketing plan, and getting the funding needed for the business.  Without a plan, you’re just running without purpose!

Adjusting to Setbacks

The best laid plans can go awry and setbacks are inevitable.  Sometimes the setbacks can be minor — a training run that doesn’t happen because of lightning or an ad campaign that doesn’t quite create the excitement you were hoping for.  These can be overcome with some tweaks to the plan.  But sometimes the setbacks are major — an injury that makes running impossible or a necessary bank loan that doesn’t come to fruition.  These setbacks require hard decisions like whether to continue.  Just like a marathon runner who continues to train when they are injured and ends up doing more damage, possibly ending any chance of ever doing a marathon, a business that reaches an impasse too difficult to surmount can do more damage by plowing forward (like bankruptcy court).  It is possible for time to correct the setback — waiting until the injury is healed and picking a race later in the calendar, or waiting until the credit markets open up to get that loan.  You just need to decide if you want to wait.

Staying Committed

Provided you haven’t hit a major setback that puts a complete end to your plan, to be successful you must be committed to the process.  A training schedule that you don’t adhere to will lead to disaster on race day.  A business plan not followed will result in half-hearted attempts to be successful.

The Big Day

For the marathoner, race day is the culmination of all of the hard work and training that has consumed their life for the past 16 – 24 weeks.  It’s the big day and they savor every moment.  Every business has a big day as well (or several) — the pitch to a retailer that results in a purchasing contract for your product or landing a big consulting job.  Businesses should savor these moments as well.

On to the Next Challenge

Once the marathon is done, many people feel a let down.  The thing they have been working so hard to achieve is now done.  This usually leads to signing up for another race so the whole process can start again.  Yes, the marathoner is a strange breed who finds pleasure in the pain they put themselves through.  So, too, is the business person.  They work hard to get that contract and instead of resting on their laurels, they move on to the next challenge because that is what defines success for them.

Whether your race is 26.2 miles or the quest to be the best in your industry, run well, run often and never look back!