Accounting Best Practices

STEVEN M. BRAGG, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and an auditor at Deloitte & Touche. He received a master's degree in finance from Bentley College, an MBA from Babson College, and a bachelor's degree in economics from the University of Maine. He has been the two-time president of the Colorado Mountain Club, is an avid alpine skier and mountain biker, and is a certified master diver. Mr. Bragg resides in Centennial, Colorado. He is also the author of Accounting Control Best Practices and Accounting Policies and Procedures Manual (both published by Wiley).

• Preface xixChapter 1 Overview of Best Practices 1Chapter 2 How to Use Best Practices 5Types of Best Practices 5The Most Fertile Ground for Best Practices 6Planning for Best Practices 7Timing of Best Practices 9Implementing Best Practices 10Best Practice Duplication 12Why Best Practices Fail 13The Impact of Best Practices on Employees 17Summary 18Chapter 3 Accounts Payable Best Practices 19Implementation Issues for Accounts Payable Best Practices 203–1 Pay Based on Receiving Approval Only 203–2 Reduce Required Approvals 253–3 Use Negative Assurance for Invoice Approvals 263–4 Designate Approval Stamp Positioning 263–5 Base Approvals on Supplier Invoicing History 273–6 Use Procurement Cards 273–7 Use a Ghost Card 323–8 Negotiate Procurement Card Rebates 323–9 Route All Invoices Directly to Accounts Payable 333–10 Split Payables Processing Based on Discounts 333–11 Adopt a Standard Invoice Numbering Convention 343–12 Automate Three-Way Matching 353–13 Digitize Accounts Payable Documents 363–14 Directly Enter Receipts into Computer 383–15 Have Suppliers Include Their Supplier Number on Invoices 393–16 Request that Suppliers Enter Invoices through a Web Site 393–17 Audit Expense Reports 403–18 Automate Expense Reporting 423–19 Eliminate Cash Advances for Employee Travel 443–20 Link Corporate Travel Policies to an Automated Expense Reporting System 453–21 Match Travel Bookings to Expenses 463–22 Centralize the Accounts Payable Function 463–23 Store Late Fees in a Separate General Ledger Account 483–24 Issue Standard Account Code List 483–25 Link Supplier Requests to the Accounts Payable Database 493–26 Shrink the Supplier Base 503–27 Withhold First Payment until W-9 Form Is Received 513–28 Automate Payments for Repetitive Invoicing 523–29 Install a Payment Factory 523–30 Eliminate Manual Checks 533–31 Eliminate Wire Transfers 543–32 Increase the Frequency of Check Runs 553–33 Settle Foreign Intercompany Payables 553–34 Have Regularly Scheduled Check-Signing Meetings 563–35 Implement Positive Pay 563–36 Incorporate Copy Protection Features into Checks 573–37 Avoid Acronym Payees on Checks 593–38 Revise Payment Terms for Electronic Payments 593–39 Install Advanced ACH Debit Blocking 603–40 Use a Signature Stamp 603–41 Notify Purchasing of Lower Invoiced Prices or Terms 613–42 Create Direct Purchase Interfaces to Suppliers 623–43 Install a Low-Cost Spend Management System 633–44 Use Blanket Purchase Orders 643–45 Issue a Welcome Packet to New Suppliers 653–46 Clean Up the Supplier Master File 663–47 Adopt a Supplier Naming Procedure 673–48 Assign Payables Staff to Specific Suppliers 683–49 Create Different Supplier Accounts for Different Terms 683–50 Review Supplier Statements for Open Credits 693–51 Issue Standard Adjustment Letters to Suppliers 69Summary 69Chapter 4 Billing Best Practices 71Implementation Issues for Billing Best Practices 714–1 Avoid Missed Billings 734–2 Remove Unnecessary Information from Invoices 744–3 Mark Envelopes with Address Correction Requested 754–4 Do Early Billing of Recurring Invoices 754–5 Have the Sales Staff Review Contact Information for Recurring Invoices 764–6 Review Billed Hours Early 764–7 Issue Electronic Invoices 774–8 Issue Single, Summarized Invoices Each Period 784–9 Print Separate Invoices for Each Line Item 794–10 Enhance the Invoice Layout 804–11 Add Receipt Signature to Invoice 814–12 Automatically Check Errors during Invoice Data Entry 814–13 Proofread Invoices 824–14 Have Delivery Person Create the Invoice 834–15 Computerize the Shipping Log 854–16 Track Exceptions between the Shipping Log and the Invoice Register 864–17 Eliminate Month-End Statements 874–18 Reduce Number of Parts in Multipart Invoices 87Summary 88Chapter 5 Budgeting Best Practices 91Implementation Issues for Budgeting Best Practices 915–1 Link the Budget to Key Business Drivers 935–2 Clearly Define All Assumptions 935–3 Clearly Define All Capacity Levels 945–4 Establish Project Ranking Criteria 955–5 Apply Throughput Analysis to Capital Budgeting 965–6 Establish the Upper Limit of Available Funding 975–7 Identify Step-Costing Change Points 985–8 Budget for Attrition 995–9 Budget by Groups of Staff Positions 995–10 Create a Summarized Budget Model for Use by Upper Management 1005–11 Include a Working Capital Analysis 1015–12 Use Activity-Based Budgeting 1025–13 Incorporate Target Costing into the Budgeting Process 1035–14 Link a Bonus Sliding Scale to the Budget 1035–15 Use Flex Budgeting 1045–16 Incorporate Risk Analysis into Budget Modeling 1055–17 Automatically Link the Budget to Purchase Orders 1055–18 Issue a Budget Procedure and Timetable 1065–19 Preload Budget Line Items 1085–20 Adopt Two-Stage Capital Budgeting 1095–21 Purchase Budgeting and Planning Software 1105–22 Reduce the Number of Accounts 1115–23 Revise Budgets on a Quarterly Basis 1115–24 Simplify the Budget Model 1125–25 Use Online Budget Updating 1135–26 Operate without a Budget 115Summary 116Chapter 6 Cash Management Best Practices 117Implementation Issues for Cash Management Best Practices 1176–1 Access Bank Account Information on the Internet 1186–2 Automatically Apply Cash 1206–3 Avoid Delays in Check Posting 1216–4 Require Mailings to Mailstop Number 1226–5 Collect Receivables through Lockboxes 1226–6 Install Remote Deposit Capture 1246–7 Consolidate Bank Accounts 1256–8 Implement Physical Cash Sweeping 1266–9 Implement Notional Pooling 1286–10 Charge Back Treasury Fees to Subsidiaries 1296–11 Implement Controlled Disbursements 1306–12 Negotiate Faster Deposited-Check Availability 1316–13 Open Zero-Balance Accounts 131Summary 132Chapter 7 Collections Best Practices 135Implementation Issues for Collections Best Practices 1357–1 Accept Check Payments by Fax 1377–2 Clearly Define Account Ownership 1387–3 Optimize the Collections Staff 1397–4 Designate a Skip Tracing Specialist 1407–5 Utilize Collection Call Stratification 1417–6 Structure the Workday Around Prime Calling Hours 1427–7 Base Deduction Management on Transaction Volume 1437–8 Set Up a Periodic Payment Schedule 1447–9 Require Customer Billing of Marketing Deductions 1447–10 Grant Percentage Discounts for Early Payment 1457–11 Conduct Immediate Review of Unapplied Cash 1467–12 Outsource Collections 1477–13 Prepare a Customer Bankruptcy Action Plan 1487–14 Sell Your Bankruptcy Creditor Claim 1497–15 Simplify Pricing Structure 1517–16 Write Off Small Balances with No Approval 1527–17 Report on Bad Debts by Salesperson 1527–18 Post Collection Results by Collector 1537–19 Create an Accurate Bad-Debt Forecast 1537–20 Use Automated Clearing House Debits 1547–21 Lock Access to the Credit-Hold Flag 1557–22 Maintain Customer Orders Database 1567–23 Subscribe to Special Event Notifications 1567–24 Set Up Automatic Fax of Overdue Invoices 1577–25 Issue Dunning Letters Automatically 1587–26 Automate E-Mail Delivery of Overdue Invoice Information 1607–27 Use a Collection Call Database 1607–28 Access Up-to-Date Collection Agency Information 1627–29 Implement Customer Order Exception Tracking System 1637–30 Install a Dispute Tracking System 1647–31 Report on Ongoing Customer Complaints 1657–32 Link to Comprehensive Collections Software Package 1667–33 Use Real-Time Cash Application Techniques 167Summary 168Chapter 8 Credit Best Practices 169Implementation Issues for Credit Best Practices 1698–1 Create a Credit Policy 1718–2 Modify the Credit Policy Based on Product Margins 1728–3 Modify the Credit Policy Based on Changing Economic Conditions 1738–4 Modify the Credit Policy Based on Potential Product Obsolescence 1738–5 Centralize Credit Risk Analysis 1748–6 Preapprove Customer Credit 1748–7 Subscribe to a Credit Report Database 1758–8 Create an Internal Credit Scoring System 1768–9 Modify Credit Application Terms to Favor the Company 1788–10 Create a Credit Application Guidebook 1798–11 Create a Standardized Credit-Level Determination System 1808–12 Incorporate Collections Information into Credit Decisions 1818–13 Require a New Credit Application if Customers Have Not Ordered in Some Time 1828–14 Review the Credit Levels of All Customers Who Stop Taking Cash Discounts 1828–15 Call New Customers and Explain Credit Terms 1838–16 Issue a Payment Procedure to Customers 1838–17 Join an Industry Credit Group 1848–18 Refer a Potential Customer to a Distributor 1858–19 Require Intercorporate Guarantees 1858–20 Obtain Check Verification and Guarantee Coverage 1858–21 Obtain Credit Insurance 1868–22 Obtain an Export Credit Guarantee 1878–23 Shorten the Terms of Sale 1888–24 Insist on Lien Rights 1898–25 Offer a Financing Program 1898–26 Combine COD Terms with a Surcharge 190Summary 190Chapter 9 Commissions Best Practices 191Implementation Issues for Commissions Best Practices 1919–1 Automatically Calculate Commissions in the Computer System 1929–2 Calculate Final Commissions from Actual Data 1939–3 Construct a Standard Commission Terms Table 1949–4 Periodically Issue a Summary of Commission Rates 1959–5 Simplify the Commission Structure 1959–6 Include Commission Payments in Payroll Payments 1969–7 Lengthen the Interval between Commission Payments 1979–8 Pay Commissions Only from Cash Received 1979–9 Increase Commissions for Cash in Advance Payments 1989–10 Periodically Audit Commissions Paid 1999–11 Install Incentive Compensation Management Software 1999–12 Post Commission Payments on the Company Intranet 2009–13 Show Potential Commissions on Cash Register 201Summary 202Chapter 10 Costing Best Practices 203Implementation Issues for Costing Best Practices 20310–1 Audit Bills of Material 20510–2 Audit Labor Routings 20610–3 Eliminate High-Leverage Overhead Allocation Bases 20710–4 Simplify Overhead Allocations 20810–5 Assign Overhead Personnel to Specific Subplants 20810–6 Use Perfect Standards for Material Variance Reporting 20910–7 Eliminate Labor Variance Reporting 20910–8 Follow a Schedule of Inventory Obsolescence Reviews 21110–9 Eliminate the Tracking of Work-in-Process Inventory 21210–10 Implement Activity-Based Costing 21310–11 Implement Throughput Accounting 21410–12 Implement Target Costing 21510–13 Track Excess Capacity 21610–14 Limit Access to Unit of Measure Changes 21610–15 Report on Landed Cost Instead of Supplier Price 21710–16 Report on Total Customer Price 21810–17 Review Cost Trends 21810–18 Review Material Scrap Levels 22010–19 Revise Traditional Cost Accounting Reports 221Summary 223Chapter 11 Filing Best Practices 225Implementation Issues for Filing Best Practices 22511–1 Improve the Mailroom Interface 22611–2 Reduce Keystroke Errors 22711–3 Use Multiple OCR Engines for Data Capture 22811–4 Add Digital Signatures to Electronic Documents 22811–5 Archive Computer Files 23011–6 Implement Document Imaging 23011–7 Eliminate Stored Paper Documents if Already in Computer 23211–8 Extend Time Period before Computer Records Are Purged 23311–9 Extend Use of Existing Computer Database 23411–10 Improve Computer System Reliability 23611–11 Adopt a Document-Destruction Policy 23811–12 Eliminate Attaching Back-up Materials to Checks for Signing 24111–13 Eliminate Reports 24111–14 Move Records Off-Site 24311–15 Reduce Number of Form Copies to File 24411–16 Use Carts for Portable File Storage 244Summary 245Chapter 12 Finance Best Practices 247Implementation Issues for Finance Best Practices 24712–1 Use an Investment Strategy for Short-Term Investments 24912–2 Use Invoice Discounting 25112–3 Sell Securities under the Regulation A Exemption 25112–4 Sell Securities under the Regulation D Exemption 25312–5 Set Up Supply Chain Financing 25412–6 Obtain Cash through Crowdfunding 25512–7 Join a Barter Network 25612–8 Automate Option Tracking 25612–9 Automate 401(k) Plan Enrollment 25712–10 Grant Employees Immediate 401(k) Eligibility 25812–11 Consolidate Insurance Policies 25812–12 Obtain Advance Rating Assessments 25912–13 Rent a Captive Insurance Company 25912–14 Use Netting to Reduce Foreign Exchange Settlements 26012–15 Install a Treasury Workstation 26112–16 Connect to the SWIFT Network 26312–17 Optimize the Organization of Treasury Operations 26412–18 Hedge Foreign Exchange with Forward Exchange Contracts 26512–19 Hedge Foreign Exchange with Currency Futures 26612–20 Lock in Interest Rates with an Interest Rate Swap 267Summary 269Chapter 13 Financial Statements Best Practices 271Implementation Issues for Financial Statements Best Practices 27213–1 Move Operating Data to Other Reports 27213–2 Restrict the Level of Reporting 27413–3 Write Financial Statement Footnotes in Advance 27513–4 Create a Disclosure Committee 27513–5 Automate Recurring Journal Entries 27613–6 Automate the Cutoff 27713–7 Avoid the Bank Reconciliation 27813–8 Defer Routine Work 27913–9 Eliminate Multiple Approvals 27913–10 Eliminate Small Accruals 28113–11 Reduce Investigation Levels 28213–12 Assign Closing Responsibilities 28213–13 Compress Billing Activities 28313–14 Conduct Transaction Training 28413–15 Continually Review Wait Times 28513–16 Convert Serial Activities to Parallel Ones 28613–17 Create a Closing Schedule 28713–18 Document the Process 28913–19 Restrict the Use of Journal Entries 29013–20 Train the Staff in Closing Procedures 29113–21 Use Cycle Counting to Avoid Month-End Counts 29213–22 Compress Public Company Closing Activities 29313–23 Use Standard Journal Entry Forms 29413–24 Complete Allocation Bases in Advance 29513–25 Reconcile Intercompany Transactions in Advance 29613–26 Conduct Daily Review of the Financial Statements 297Summary 297Chapter 14 General Best Practices 299Implementation Issues for General Best Practices 29914–1 Apply Run Charts to Accounting Processes 30114–2 Apply Check Sheets to Accounting Processes 30314–3 Apply Value Stream Mapping to Accounting Processes 30414–4 Apply the Production Cell Layout to Accounting 30514–5 Create a Best Practices Support Center 30614–6 Consolidate All Accounting Functions 30714–7 Continually Review Key Process Cycles 30814–8 Create a Policies and Procedures Manual 31014–9 Eliminate All Transaction Backlogs 31414–10 Implement Process-Centering 31414–11 Remove Clutter from the Accounting Workspace 31514–12 Issue Activity Calendars to All Accounting Positions 31614–13 Switch to Online Reporting 31714–14 Track Function Measurements 31814–15 Discuss Major Accounting Decisions with Auditors 31914–16 Create a Contract Terms Database 31914–17 Install a Knowledge Management System 32314–18 Monitor Fixed Assets with Wireless Sensors 32314–19 Create an Online Tax Policy Listing 32414–20 Designate a Tax Liaison for Each Government Jurisdiction 32514–21 Assign Tax Staff to Business Units 32514–22 Outsource Tax Form Preparation 32614–23 Submit Electronic Tax Returns to the IRS 32614–24 Pay Federal Taxes Online 32714–25 Create Accounting Training Teams 32814–26 Create an Ongoing Training Program for All Accounting Personnel 32914–27 Implement Cross-Training for Mission-Critical Activities 332Summary 333Chapter 15 General Ledger Best Practices 335Implementation Issues for General Ledger Best Practices 33515–1 Eliminate Small-Balance Accounts 33715–2 Modify Account Code Structure for Storage of ABC Information 33715–3 Create Alphanumeric Department/Subsidiary Codes 33815–4 Reduce the Chart of Accounts 33915–5 Use Identical Chart of Accounts for Subsidiaries 34015–6 Require Senior Approval to Add Accounts 34315–7 Use Data Warehouse for Report Distribution 34315–8 Use Forms/Rates Data Warehouse for Automated Tax Filings 34415–9 Use the General Ledger as a Data Warehouse 34515–10 Restrict Use of Journal Entries 34615–11 Avoid General Ledger Posting Bottlenecks 34715–12 Have Subsidiaries Update Their Own Data in the Central General Ledger 34815–13 Prescreen Construction-in-Progress Entries 349Summary 349Chapter 16 Internal Auditing Best Practices 351Implementation Issues for Internal Auditing Best Practices 35116–1 Annually Update an Internal Control Assessment of Each Business Unit 35316–2 Issue Self-Audit Guides to Business Units 35416–3 Recommend Business Process Improvements to Business Units 35416–4 Track Audit Results through Business Unit Surveys 35516–5 Train Business Unit Staff on Control Issues 35616–6 Train New Business Unit Managers on Control Issues 35616–7 Avoid Over auditing of Internal Audits 35716–8 Complete All Internal Audit Work Papers in the Field 35816–9 Create a Control Standards Manual 35816–10 Create an Online Internal Audit Library 35916–11 Create and Disseminate Information from a Best Practices Database 35916–12 Outsource the Internal Audit Function 36016–13 Schedule Some Internal Audits on a Just-in-Time Basis 36116–14 Schedule Internal Audits Based on Risk 36116–15 Use Workflow Software for Internal Audits 36216–16 Implement Continuous Controls Monitoring 36316–17 Fill Internal Audit Positions from Operations on a Rotating Basis 36416–18 Add Specialists to Audit Teams 36416–19 Assign an Auditor to Be a Relationship Manager with Each Business Unit 36516–20 Assign Internal Auditors to System Development Teams 36616–21 Create an Auditor Skills Matrix 36616–22 Use Excel for Continuous Auditing 36716–23 Support the Outside Auditors 368Summary 368Chapter 17 Inventory Best Practices 369Implementation Issues for Inventory Best Practices 36917–1 Audit Bills of Material 37217–2 Conduct a Configuration Audit 37317–3 Modify the Bills of Material Based on Actual Scrap Levels 37417–4 Review Inventory Returned to the Warehouse 37417–5 Modify the Bills of Material for Temporary Substitutions 37517–6 Use Bills of Material to Find Inventory Made Obsolete by Product Withdrawals 37617–7 Compare Open Purchase Orders to Current Requirements 37717–8 Reject Unplanned Receipts 37717–9 Obtain Advance Shipping Notices for Inbound Deliveries 37817–10 Eliminate the Receiving Function 37917–11 Use Standard Containers to Move, Store, and Count Inventory 38017–12 Use Different Storage Systems Based on Cubic Transactional Volume 38117–13 Organize the Warehouse by Storage Zones 38117–14 Optimize Inventory Storage through Periodic Location Changes 38217–15 Maximize Vertical Storage Space 38217–16 Use Narrow Aisles in Manual Putaway and Picking Zones 38317–17 Eliminate the Warehouse 38417–18 Audit All Inventory Transactions 38517–19 Compare Recorded Inventory Activity to On-Hand Inventories 38617–20 Eliminate the Physical Count Process 38717–21 Cycle-Count Based on Usage Frequency 38917–22 Lock Down the Warehouse Area 38917–23 Move Inventory to Floor Stock 39017–24 Segregate Customer-Owned Inventory 39117–25 Streamline the Physical Count Process 39217–26 Track Inventory Accuracy 39417–27 Train the Warehouse and Accounting Staffs in Inventory Procedures 39517–28 Initiate Warehouse Staff Self-Auditing 39617–29 Verify That All Receipts Are Entered in the Computer at Once 39617–30 Record Inventory Transactions with Bar Codes 39717–31 Record Inventory Transactions with Radio Frequency Communications 39817–32 Track Inventory with Radio Frequency Identification (RFID) 39917–33 Eliminate All Paper from Inventory Transactions 40017–34 Install a Kanban System 40117–35 Eliminate All Transaction Backlogs 40217–36 Immediately Review All Negative Inventory Balances 40317–37 Reduce the Number of Products 40317–38 Reduce the Number of Product Options 40417–39 Design Products with Lower Tolerances 40417–40 Obtain Direct Links into Customer Inventory Planning Systems 40517–41 Adopt Just-in-Time Purchasing 40617–42 Shift Raw Materials Ownership to Suppliers 40717–43 Drop Ship Inventory 40817–44 Reduce Safety Stocks by Accelerating the Flow of Internal Information 40817–45 Reduce Safety Stock by Shrinking Supplier Lead Times 40917–46 Reduce Safety Stock with Risk Pooling 41017–47 Use Variable Safety Stocks for Fluctuating Demand 41017–48 Cross-Dock Inventory 41117–49 Use Overnight Delivery from a Single Location for Selected Items 41217–50 Focus Inventory Reduction Efforts on High-Usage Items 41217–51 Eliminate Redundant Part Numbers 41317–52 Standardize Parts 41417–53 Identify Inactive Inventory in the Product Master File 415Summary 415Chapter 18 Payroll Best Practices 417Implementation Issues for Payroll Best Practices 41818–1 Disallow Prepayments 42018–2 Create Employee Self-Service for Payroll Changes 42118–3 Minimize Payroll Deductions 42218–4 Prohibit Deductions for Employee Purchases 42318–5 Post Forms on an Intranet Site 42318–6 Avoid Job Costing through the Payroll System 42418–7 Use Computerized Time Clocks 42518–8 Use Exception Time Reporting 42618–9 Install Automated Timesheet Reminders 42718–10 Reduce the Number of Pay Codes 42718–11 Use Biometric Time Clocks 42818–12 Track Time with Mobile Phones 42818–13 Install Additional Time Clocks 42918–14 Issue Electronic W-2 Forms to Employees 42918–15 Transfer Payroll to Debit Cards 43018–16 Use Direct Deposit 43218–17 Automate Vacation Accruals 43418–18 Consolidate Payroll Systems 43418–19 Create a Payroll Call Center for Employees 43518–20 Eliminate Personal Leave Days 43718–21 Link Payroll Changes to Employee Events 43718–22 Install Manager Self-Service 43818–23 Link the 401(k) Plan to the Payroll System 44018–24 Link the Payroll and Human Resources Databases 44018–25 Minimize Payroll Cycles 44118–26 Minimize Off-Cycle Payrolls 44218–27 Create a Year-End Payroll Processing Checklist 44318–28 Electronically Verify Employee I-9 Information 44418–29 Reduce Taxes with the Common Paymaster Rule 44518–30 Outsource the Payroll Function 44518–31 Post FAQ Answers and Issue a Payroll Orientation Brochure 447Summary 448Appendix: Summary of Best Practices 449About the Author 465Index 467