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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.

Financial Reports: Useful or Useless?

Finance & accounting departments are ultimately about reporting.  If you are a public company, there is the required reporting to the SEC and the shareholders.  And regardless of whether you are public or private, there are many other external reports that allow the business to meet its obligations to external stakeholders like banks.  But the focus of this post is on the internal reporting within every company.  This is the reporting that is hopefully adding value and helping to provide direction as the business drives towards its goals and objectives.  Unfortunately, all reports are not created equal and many fall far short of the value they were intended to create.

The problem with reports that don’t live up to their expectations is they are time wasters on two fronts — for finance & accounting who prepare the reports and for everyone else trying to decipher what information in the report is important (if any).  When this happens, people begin to question the value of not just the reports but of the finance & accounting group as a whole.  As financial professionals, we are expected to provide information that is valuable to decision-making; clear, concise & accurate in its presentation; and timely to the needs of the business.

Probably the biggest pain is the reports that have been around since the dawn of time.  They are usually the biggest drain on resources because of the way they are structured and where the information comes from.  These reports probably bear no resemblance to where the business is today and focuses on things that are no longer goals of the company.  But if you ask everyone if the report can be stopped, they drag out their pitchforks and want to lynch you for even suggesting it.  How can they possibly continue when the report has been a part of their business life for so long?  I remember one of my employees coming to me about a report like this and asked what they should do.  I looked at the report and, in my opinion, it really wasn’t a valuable report.  My advice — don’t do it for two weeks and see if anyone squawks.  Surprisingly (or not), not a single person noticed the report was missing!  The takeaway from this is every report should be reviewed with a critical eye on a regular basis to determine if it still adds value in the context of the business’ goals and objectives.  If it doesn’t, show it the door.

Equally important is reviewing reports to see if gains in efficiency can be made in preparing them.  Look for reports that contain the same information and see if they can be consolidated.  Determine if detail is really necessary or if the report users just want the summary.  Also, see how often a report is really needed.  If the report users only look at the information once a month before a scheduled meeting, why are you busting a gut getting it out weekly?  Ensuring that reporting is a value-added exercise requires good communications between finance and the rest of the business.  Understanding their needs and balancing it with what we can do given the resources we have can be a challenge.  But if the end result is better reporting leading to better decision-making, we’ve done our job well.

(De)Centralization

Someone once told me a story about a man who only kept two files in his desk — one on how to centralize the company and one on how to decentralize it.  It turns out every time there was a change in leadership, there would be a corresponding shift in the way the company was structured.  Why all the flip flopping?  Is one structure better than the other?  Or is this just a case of someone putting a stake in the ground to put their own signature on the company?

Quite honestly, there is no clear cut answer about what is best for a business.  Whether to centralize or decentralize needs to be evaluated on a case-by-case basis by considering the goals of the company and how interactions, both internally and externally, will get the business to those goals.  What happens more often than not is a hybrid situation.  Sales is decentralized but marketing is centralized.  HR is centralized but operations is decentralized.  However, there are two areas of a company where I think at least some centralization needs to be strongly considered — finance & accounting and IT.

Many of the arguments for centralizing these two functions are similar:

  • There are economies of scale to be gained from managing bulk transactions or company-wide systems with a dedicated group of employees.
  • Consistency and best practices can be filtered throughout the organization.
  • Maintaining controls and ensuring prescribed procedures are followed is easier.

In today’s economy, and with the multitude of legislative requirements especially surrounding the finance & accounting field like SARBOX, these thoughts should be at the top of the list when considering the centralization question.  Centralization of functional areas like A/P, A/R, cash management and payroll is important to consider since these are prime gateways to fraud and embezzlement.  And the recent stories coming out of Koss, Avaya and Bank of America should certainly make us sit up and take notice.  This is not to say centralization would completely protect a company but it’s easier to ensure the controls to prevent it are followed.

Even though it may seem I’m a huge proponent of centralization for finance & accounting, you will notice I said some centralization needs to be strongly considered.  One of the downfalls of having all of finance & accounting run from a central perspective is often the creation of an “us vs. them” mentality.  Finance is viewed as being prohibitive, not working with the business and being more concerned with following the rules regardless of the impact on operations.

There is a way to avoid this — ensure there is good communication between finance and the business units.  One of the best ways to accomplish this is to have a dedicated accountant or analyst working with each group that is actually part of their team.  The accountant can act as a champion for the unit to see their needs are addressed but are still balanced with the requirements from the center.  They also gain a better understanding of the unit and can provide the insight needed when doing variance analysis or business evaluations as part of the reporting process.  This is how I structured my department and each of my accountants became a valued team member whose opinion was sought in day-to-day decision making.

Ultimately, each company must weigh their requirements and their culture to structure the finance & accounting function so it provides the support and value needed by the business.  Just remember, it doesn’t have to be an all-or-nothing proposition when it comes to centralization or decentralization.