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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.