Financial reporting isn’t all about profits. Not-for-profit entities can also benefit from implementing formal accounting processes. From preparing budgets and monitoring financial results to paying invoices and handling payroll tax, there’s a lot that falls under the accounting umbrella. Are these tasks, and others, being managed as efficiently at your organization as they could be?

Start with invoicing

A good first step toward accounting function improvement is creating policies and procedures for the monthly cutoff of recording vendor invoices and expenses. For instance, you could require all invoices to be submitted to the accounting department within one week after the end of each month. Too many adjustments — or waiting for employees or departments to weigh in — can waste time and delay the completion of your financial statements.

Another tip about invoices: It’s generally best not to enter only one invoice or cut only one check at a time. Set aside a block of time to do the job when you have multiple items to process.

You also may be able to save time at the end of the year by reconciling your balance sheet accounts each month. It’s a lot easier to correct errors when you catch them early. Also, reconcile accounts payable and accounts receivable subsidiary ledgers to your statements of financial position.

Think through data collection

Designing a coding cover sheet or stamp is another way to boost efficiency. An accounting clerk or bookkeeper needs a variety of information to enter vendor bills and donor gifts into your accounting system. You can speed up the process by collecting all the information on the invoice or donor check copy using a stamp. Route invoices for approval in a folder that lists your not-for-profit’s general ledger account numbers so that the employee entering data doesn’t have to look them up each time.

The cover sheet or stamp also should provide a place for the appropriate person to approve the invoice for payment. Use multiple-choice boxes to indicate which cost centers the amounts should be allocated to. Documentation of the invoice’s payment should also be recorded for reference. And your development staff should provide the details for any donor gifts prior to your staff recording them in the accounting system.

Optimize accounting software

Many organizations underuse the accounting software package they’ve purchased because they haven’t invested enough time to learn its full functionality. If needed, hire a trainer to review the software’s basic functions with staff and teach time-saving tricks and shortcuts.

Standardize the financial reports coming from your accounting software to meet your needs with no modification. This not only will reduce input errors but also will provide helpful financial information at any point, not just at month’s end.

Consider performing standard journal entries and payroll allocations automatically within your accounting software. Many systems have the ability to automate, for example, payroll allocations to various programs or vacation accrual reports. But review any estimates against actual figures periodically, and always adjust to the actual amount before closing your books at year end.

Ongoing review

Accounting processes can become inefficient over time if they aren’t monitored. Look for labor-intensive steps that could be automated or steps that don’t add value and could be eliminated. Also make sure that the individual or group that’s responsible for the organization’s financial oversight (for example, your CFO, treasurer or finance committee) promptly reviews monthly bank statements and financial statements for obvious errors or unexpected amounts. Contact us for more tips on how to improve the accounting function at your nonprofit.

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How accurate is the amount reported in your company’s perpetual inventory system? To best answer that question, a physical count is essential at year end. For calendar-year entities, year end is fast approaching on December 31.

Planning tips

Though physical counts may be seen as time consuming and disruptive, a well-executed count of what’s on-hand can provide valuable insight into operational efficiency. Here are five tips on how to prepare for your count to maximize the benefits and minimize the hassle.

1. Order (or create) prenumbered inventory tags. Most companies use two-part tags to count inventory. One tag stays with the item on the shelf; the other is returned to the manager at the end of the count. Tags are numbered sequentially to ensure the manager can account for every tag issued. Using a tagging system prevents items from being counted twice or omitted. Each tag should identify the part number, location, quantity and person who performed the count. To avoid scrambling around last minute, assign someone in your accounting department to get this task done at least a month before your count is scheduled to start.
2. Preview inventory. Most companies do a dry run a few days before the count to identify any potential roadblocks and determine how many workers to schedule. This makes the count more efficient and gives warehouse personnel the opportunity to correct any foreseeable problems, such as missing part numbers, unbagged supplies and an insufficient amount of inventory tags.
3. Assign workers to count inventory. Assemble two-person teams to prevent fraudulent counts. Assign each team a specific area of the warehouse to count. (A map often helps workers identify count zones.) Never give employees inventory listings to reference during the count — otherwise, they may be tempted to duplicate the amount from the listing, rather than bring attention to a possible discrepancy.
4. Write off any unsalable items. All defective or obsolete items should be thrown away or recycled before the inventory count begins. There’s no sense counting items that will be written off.
5. Pre-count and bag slow-moving items. To make the physical count faster, some items that aren’t expected to be used before year end can be counted a few days in advance. Pre-counted items should be tagged and placed in sealed containers. If a broken seal is noticed on the day of the actual physical count, the items in the container should be recounted.

Inventory values

Under U.S. Generally Accepted Accounting Principles (GAAP), inventory is recorded at the lower of cost or market value. However, estimating the market value of inventory may involve subjective judgment calls, particularly if your company converts the goods from raw materials into finished goods available for sale. The value of work-in-progress inventory can be especially hard to objectively assess, because it includes overhead allocations and, in some cases, may require percentage of completion assessments.

The value of inventory is always in flux as work is performed and items are delivered or shipped. To capture a static value at year end, it’s essential that business operations “freeze” while the count takes place. Usually, it makes sense to count inventory during off-hours to minimize the disruption to business operations. For larger organizations with multiple locations, it may not be possible to count everything at once. So, larger companies often break down their counts by physical location.

Your auditor’s role

If your company issues audited financial statements, one or more members of your external audit team will be present during your physical inventory count. Auditors aren’t there to help you count inventory. Instead, they’ll observe the procedures (including any statistical sampling methods), review written inventory processes, evaluate internal controls over inventory, and perform independent counts to compare to your inventory listing and counts made by your employees.

They’ll also look for obsolete, broken or slow-moving items that need to be written off. Be ready to provide them with invoices and shipping/receiving reports. Auditors review these documents to evaluate cutoff procedures for year-end deliveries and confirm the values reported on your inventory listing.

For more information

Contact us to discuss physical inventory counting procedures. We can help you get it right and investigate any discrepancies between your count and the amount reported in your company’s perpetual inventory system.

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Bookkeeping is essential to running a business. QuickBooks® is one of the most popular software programs for this purpose because it offers numerous features that other programs may not have.

Functionality

In addition to being affordable, QuickBooks® has many features to help small and midsized businesses optimize operations and pursue growth opportunities. This includes customized solutions for accountants, contractors, manufacturers, nonprofits, professional services, retail, wholesalers and distributors. The software provides a one-stop solution for:

• Tracking income and expenses,
• Creating invoices and reports,
•  Estimating and monitoring projects and job costs,
•  Filing payroll, sales and income taxes,
•  Managing inventory and fixed assets,
•  Reporting and analyzing financial performance, and
•  Budgeting and forecasting future results.

It also integrates with other business software programs, such as payroll and e-commerce platforms, including Amazon, eBay and Shopify.

Collaborative tool

QuickBooks® houses real-time financial information, so it provides a platform to collaborate with outside accounting professionals. This software allows you to give your accountant secure access to your books so they can optimize your use of the platform. Specifically, your CPA can:

• Evaluate your financial data,
•  Offer advice on business decisions, growth strategies and accounting best practices,
•  Plan for state and federal taxes, and
•  Uncover errors or omissions.

This allows you to focus on your company’s operations, while your external accountant concentrates on financial reporting and tax matters. With this approach, you can can free up resources and improve the accuracy of the reports you rely upon to run the company. In addition, it allows you to make fact-based decisions about the future of your business.

Is QuickBooks® right for your business?

QuickBooks® offers a range of accounting software packages to choose from. We have experience helping business owners and controllers maximize the benefits of these packages, as well as solutions provided by other software manufacturers. Contact us to help you evaluate the options, based on the current needs of your business.

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Does your company use supplier finance programs to buy goods or services? If so, and if you must adhere to U.S. Generally Accepted Accounting Principles (GAAP), there will be changes starting next year. At that time, you must disclose the full terms of supplier finance programs, including assets pledged to secure the transaction. Here are the details of this new requirement under GAAP.

Gap in GAAP

Supplier finance programs — sometimes called “structured payables” and “reverse factoring” — are popular because they offer a flexible structure for paying for goods and services. In a traditional supplier arrangement, the buyer agrees to pay the supplier directly within, say, 30 to 45 days.

Conversely, with a supplier finance program, the buyer arranges for a third-party finance provider or intermediary to pay approved invoices before the due date at a discount from the stated amount. Meanwhile the buyer receives an extended payment date, say, 90 to 120 days, in exchange for a fee. This enables the buyer to keep more cash on hand. However, many organizations haven’t been transparent in disclosing in their financial statements the effects those programs have on working capital, liquidity and cash flows.

That’s the reason the Financial Accounting Standards Board recently issued Accounting Standard Update (ASU) No. 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. It will require buyers to disclose the key terms of supplier finance programs and where any obligations owed to finance companies have been presented in the financial statements.

More details

Supplier finance programs are a relatively new form of arrangement that continues to evolve and grow in popularity. Even after this ASU becomes effective, GAAP doesn’t provide any specific guidance on where to present the amounts owed by the buyers to finance companies. It’s up to the buyer to decide whether these obligations should be presented as accounts payable or short-term debt.

However, the updated guidance does require that in each annual reporting period, a buyer must disclose:

• The key terms of the program, including a description of the payment terms and assets pledged as security or other forms of guarantees provided for the committed payment to the finance provider or intermediary, and
• For the obligations that the buyer has confirmed as valid to the finance provider or intermediary 1) the amount outstanding that remains unpaid by the buyer as of the end of the annual period, 2) a description of where those obligations are presented in the balance sheet, and 3) a roll-forward of those obligations during the annual period, including the amounts of obligations confirmed and obligations subsequently paid.

In each interim reporting period, the buyer must disclose the amount of obligations outstanding that the buyer has confirmed as valid to the finance provider or intermediary as of the end of the period.

Ready, set, go 

The new rules take effect for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on roll-forward information. That provision is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. Contact us for more information or help implementing the changes.

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One of the best ways to tackle financial statement fraud is to conduct periodic surprise audits. In fact, surprise audits were associated with at least a 50% reduction in both median loss and median duration, according to Occupational Fraud 2022: A Report to the Nations published by the Association of Certified Fraud Examiners (ACFE) earlier this year.

Surprisingly, however, less than half of respondents (42%) conduct surprise audits. So, numerous organizations have an opportunity to add this highly effective tool to their antifraud arsenal.

Cost of financial misstatement

Financial statement fraud happens when “an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports.” Examples include a salesperson who prematurely reports sales to boost commissions or a controller who books fictitious revenue to hide theft — or lackluster financial performance.

These types of schemes can be costly. The ACFE’s survey found that the median loss from misstated financial results is roughly $593,000.

Element of surprise

Routine financial statement audits don’t provide an absolute guarantee against financial misstatement and other fraud schemes. In fact, external audits were the primary detection method in just 4% of the cases reported in the ACFE study. Although a financial statement audit serves as a vital role in corporate governance, the ACFE advises that it shouldn’t be relied upon as an organization’s primary antifraud mechanism.

By comparison, a surprise audit more closely examines the company’s internal controls that are intended to prevent and detect fraud. Here, auditors aim to identify any weaknesses that could make assets vulnerable and to determine whether anyone has already exploited those weaknesses to misappropriate assets. Auditors show up unexpectedly — usually when the owners suspect foul play, or randomly as part of the company’s antifraud policies — to review cash accounts, bank statements, expense reports, payroll, purchasing, sales and other areas for suspicious activity.

The element of surprise is critical. Announcing an upcoming audit gives wrongdoers time to cover their tracks by shredding (or creating false) documents, altering records or financial statements, or hiding evidence.

Perpetrators are likely to have paid close attention to how previous financial statement audits were performed — including the order in which the auditor proceeded. But, in a surprise audit, the auditor might follow a different process or schedule. For example, instead of beginning audit procedures with cash, the auditor might first scrutinize receivables or vendor invoices. Surprise audits focus particularly on high-risk areas such as inventory, receivables and sales. In the course of performing them, auditors typically use technology to conduct sampling and data analysis.

Big benefits

In the ACFE survey, the median loss for organizations that conducted surprise audits was $75,000, compared with a median loss of $150,000 for those organizations that didn’t perform this measure — a 50% difference. This discrepancy is no surprise in light of how much longer fraud schemes went undetected in organizations that failed to conduct surprise audits. The median duration in those organizations was 18 months, compared with only nine months for organizations that performed surprise audits.

Such audits can have a strong deterrent effect as well. While surprise audits, by definition, aren’t announced ahead of time, companies should state in their fraud policies that random tests will be conducted to ensure internal controls aren’t being circumvented. If this isn’t enough to deter would-be thieves or convince current perpetrators to abandon their schemes, simply seeing guilty co-workers get swept up in a surprise audit should do the trick.

Additional investigation

As with financial statement audits, an auditor’s finding of suspicious activity in a surprise audit will likely require additional forensic investigation. Depending on the type of scheme, an auditor might conduct interviews with suspects and possible witnesses, scour financial statements and records, and perform in-depth data analysis to get to the bottom of the matter. Contact us to schedule a surprise audit for your organization.

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