Timing is critical in financial reporting. Under accrual-basis accounting, the end of the accounting period serves as a “cutoff” for when companies recognize revenue and expenses. However, some companies may be tempted to play timing games, especially at year-end, to boost financial results or lower taxes.

Observing the end-of-period cutoffs

Under U.S. Generally Accepted Accounting Principles (GAAP), revenue should be recognized in the accounting period it’s earned, even if the cash is received in a subsequent period. Likewise, expenses should be recognized in the period they’re incurred, not necessarily when they’re paid. And expenses should be matched with the revenue they generate, so businesses should record expenses in the period they were incurred to earn the corresponding revenue.

However, some companies may interpret the cutoff rules loosely to present their financial results more favorably. For example, suppose a calendar-year car dealer allows a customer to take home a vehicle on December 28, 2024, to test drive for a few days. The sales manager has verbally negotiated a deal with the customer, but the customer still needs to discuss the purchase with his spouse. He plans to return on January 2 to close the deal or return the vehicle and walk away. Under accrual-basis accounting, should the sale be reported in 2024 or 2025?

Alternatively, consider a calendar-year, accrual-basis retailer that pays January’s rent on December 31, 2024. Rent is due on the first day of the month. Under accrual-basis accounting, can the store deduct an extra month’s rent from this year’s taxable income?

As tempting as it might be to inflate revenue to impress stakeholders or defer taxable income to lower the current year’s tax bill, the cutoff for a calendar-year, accrual-basis business is December 31. So, in both examples, the transaction should be reported in 2025.

Auditing cutoffs

Auditors use several procedures to test for compliance with cutoff rules. For example, to ensure revenue is recorded in the correct accounting period, auditors may review:

• Shipping documents and customer invoices,
• Sales transactions near the cutoff date, and
• Returns and allowances near the cutoff date.

Similarly, to ensure expenses are recorded in the correct accounting period, auditors may inspect contracts and invoices near the cutoff date. They also check that expenses are matched with the revenue they help generate, in accordance with the matching principle. An accrual (a liability) is recorded for expenses incurred in the current period that still need to be paid later. Conversely, prepaid assets represent expenses paid in the current period that will be reported later when they’re used to generate future revenue. Auditors also may perform analytical procedures that compare expenses as a percentage of sales from period to period to identify timing errors and other anomalies.

It’s important to note that updated guidance for reporting revenue went into effect for calendar-year public companies in 2018 and for calendar-year private businesses starting in 2019. Under Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, revenue should be recognized “to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services.”

Although this guidance has been in effect for several years, implementation questions linger, especially among smaller private entities. The guidance requires management to make judgment calls each reporting period about identifying performance obligations (promises) in contracts, allocating transaction prices to these promises, and estimating variable consideration. The risk of misstatement and the need for expanded disclosures have caused auditors to focus greater attention on companies’ recognition practices for revenue from long-term contracts. During audit fieldwork, expect detailed questions about your company’s cutoff policies and extensive testing procedures to confirm compliance with the accounting rules.

Now or later?

As year-end approaches, you may have questions about the cutoff rules for reporting revenue and expenses. Contact us for answers. We can help you comply with the rules and minimize audit adjustments.

Is your company planning to hire a new CFO? A recent survey found that hiring managers look for more than financial acumen when vetting CFO candidates. In fact, only 38.5% of CFOs at Fortune 500 and S&P 500 companies were licensed CPAs in 2023, according to executive recruiting firm Crist Kolder. What other skills may be needed to fill these shoes?

Financial know-how opens doors.

The Pennsylvania Institute of Certified Public Accountants recently surveyed over 320 hiring executives about what skills matter most for the CFO role. Not surprisingly, “2024 Corporate Finance Report: CPAs in the C-Suite” found that the top must-have for CFO candidates is the ability to manage the company’s finances effectively.

The top 10 financial skills identified in the survey include:

1.Capital management and strategy,

2.Financial forecasting,

3.Operations and financial reporting,

4.Critical thinking,

5.Financial reporting compliance,

6.Strategy creation,

7.Industry/product forecast and outlook,

8.Tax compliance,

9.Accounts receivable, and

10.Networking and industry relationships.

The survey draws two key findings. First, CPAs aspiring to become CFOs must expand their skill sets beyond traditional accounting to include strategic planning, risk management, and technology oversight. Second, today’s CFOs must “strategize for growth and stability, not just report past results.”

Nonfinancial skills seal the deal.

Today’s hiring managers are looking for more than finance and accounting skills when filling CFO positions. They prefer candidates with the following general competencies, listed in order of importance:

• Leadership/strategic aptitude to develop high-performing teams and strategic goals,
• Compliance and regulatory expertise to ensure organizational adherence to laws, regulations, and internal policies,
• Technology and analytical proficiency to make data-driven decisions and use cutting-edge tools,
• Industry-specific knowledge to understand market conditions and how they influence the organization, and
• Communication skills to build effective relationships with internal and external stakeholders to maintain alignment with corporate strategy.

In addition, respondents emphasized the need for CFO candidates to possess “general business acumen” and “emotional intelligence.” However, the survey cautions that most hiring managers assume candidates who apply for executive positions have already mastered these general skills.

What’s the right fit for your executive team?

Finding the right person to head up your company’s finance and accounting department can be challenging in today’s tight labor market. The CFO’s main responsibility is to provide timely, relevant financial data to other departments — including information technology, operations, sales, and supply chain logistics — to help improve the business’s operations. He or she also must be able to drum up cross-departmental support for major initiatives. So, it’s important that you choose a candidate who’s a team player. You might even want to outsource the position to a skilled professional. Contact us for help evaluating CFO candidates to find the right mix of skills and experience for your company’s finance and accounting department.

The average cost of a data breach has reached $4.88 million, up 10% from last year, according to a recent report. As businesses increasingly rely on technology, cyberattacks are becoming more sophisticated and aggressive, and risks are increasing. What can your organization do to protect its profits and assets from cyberthreats?

Recent report

In August 2024, IBM published “Cost of a Data Breach Report 2024.” The research, conducted independently by Ponemon Institute, covers 604 organizations that experienced data breaches between March 2023 and February 2024. It found that, of the 16 countries studied, the United States had the highest average data breach cost ($9.36 million).

The report breaks down the global average cost per breach ($4.88 million) into the following four components:

1. $1.47 million for lost business (for example, revenue loss due to system downtime and costs related to lost customers, reputation damage and diminished goodwill),
2. $1.63 million for detection and escalation (such as forensic and investigative activities, assessment and audit services, crisis management, and communications to executives and boards),
3. $1.35 million for post-breach response (including product discounts, regulatory fines, legal fees, and costs related to setting up call centers and credit monitoring / identity protection services for breach victims), and
4. $430,000 for notifying regulators, as well as individuals and organizations affected by the breach.

A silver lining from the report is that the average time to identify and contain a breach has fallen to 258 days from 277 days in the 2023 report, reaching a seven-year low. One key reason for faster detection and recovery is that organizations are giving more attention to cybersecurity measures.

Implementing cybersecurity protocols

Cybersecurity is a process where internal controls are designed and implemented to:

• Identify potential threats,
• Protect systems and information from security events, and
• Detect and respond to potential breaches.

The increasing number of employees working from home exposes their employers to greater cybersecurity risk. Many companies now have sensitive data stored in more places than ever before — including laptops, firm networks, cloud-based storage, email, portals, mobile devices and flash drives — providing many potential areas for unauthorized access.

Targeted data

When establishing new cybersecurity protocols and reviewing existing ones, it’s important to identify potential vulnerabilities. This starts by inventorying the types of employee and customer data that hackers might want to steal. This sensitive material may include:

• Personally identifiable information, such as phone numbers, physical and email addresses, and Social Security numbers,
• Protected health information, such as test results and medical histories, and
• Payment card data.

Companies need to have effective controls over this data to comply with their obligations under federal and state laws and industry standards.
Hackers may also try to access a company’s network to steal valuable intellectual property, such as customer lists, proprietary software, formulas, strategic business plans, and financial data. These intangible assets may be sold or used by competitors to gain market share or competitive advantage.

Auditing cyber risks

No organization, large or small, is immune to cyberattacks. As the frequency and severity of data breaches continue to increase, cybersecurity has become a critical part of the audit risk assessment.

Audit firms provide varying levels of guidance, both when assessing risk at the start of the engagement and when uncovering a breach that happened during the period under audit or during audit fieldwork.

We can help

Contact us to discuss your organization’s vulnerabilities and the effectiveness of its existing controls over sensitive data. Additionally, if your company’s data is hacked, we can help you understand what happened, estimate and disclose the costs, and fortify your defenses going forward.

It usually takes between two and six weeks for management to prepare financial statements that comply with the accounting rules. The process takes longer if an outside accountant reviews or audits your reports. Timely information is critical to making informed business decisions and pivoting as needed if results fall short of expectations. That’s why proactive managers often turn to flash reports for more timely insights.

The benefits

Flash reports typically provide a snapshot of key financial figures, such as cash balances, receivables aging, collections, and payroll. Some metrics might be tracked daily, such as sales, shipments and deposits. This is especially critical during seasonal peaks, when undergoing major changes, or when your business is struggling to make ends meet.

Effective flash reports are simple and comparative. Those that take longer than an hour to prepare or use more than one sheet of paper are too complex to maintain. Comparative flash reports may help identify patterns from week to week — or deviations from the budget that may need corrective action.

The limitations

Flash reports also can identify problems and weaknesses. But they have limitations that management should recognize to avoid misuse.
Most importantly, flash reports provide a rough measure of performance and are seldom 100% accurate. It’s also common for items such as cash balances and collections to ebb and flow throughout the month, depending on billing cycles.

Companies generally only use flash reports internally. They’re rarely shared with creditors and franchisors, unless required in bankruptcy or by a franchise agreement. A lender also may ask for flash reports if a business fails to meet liquidity, profitability and leverage covenants.

If shared flash reports deviate from what’s subsequently reported on financial statements that comply with U.S. Generally Accepted Accounting Principles (GAAP), it may raise a red flag with stakeholders. For instance, they may wonder if you exaggerated results on flash reports or your accounting team is simply untrained in financial reporting matters. If you need to share flash reports, consider adding a disclaimer that the results are preliminary, may contain errors or omissions, and haven’t been prepared in accordance with GAAP.

What’s right for your organization?

There’s no one-size-fits-all format for flash reports. For example, billable hours are more relevant to law firms, and machine utilization rates are more relevant to manufacturers. Contact us for help customizing your flash reports to incorporate the key metrics that are most relevant for your industry. We can also answer questions about any reporting concerns you may be facing today.

Proactive working capital management is essential to successful business operations. However, on average, businesses aren’t managing their working capital as efficiently as they have in the past, according to a new study by The Hackett Group, a digital transformation and AI strategy consulting firm.
The study found that all elements of the cash conversion cycle (CCC) deteriorated by an average of 1.3 days (or 4%) from 2022 to 2023. The sectors reporting the biggest CCC deterioration include marine shipping, biotechnology, oil and gas, and food and staples retail. Here’s why working capital management is so important, and how your business can avoid the trend revealed in the study.

Why working capital matters

Working capital equals the difference between current assets and current liabilities. Organizations need a certain amount of working capital to run their operations smoothly. However, excessive amounts can hinder growth and performance. The optimal amount of working capital depends on the nature of your company’s operations and its industry.

Working capital management is often evaluated by measuring the CCC, which is a function of three turnover ratios:
1. Days in accounts receivable outstanding,
2. Days in inventory outstanding, and
3. Days in accounts payable outstanding.

A positive CCC indicates the number of days a company must borrow or tie up capital while awaiting payments from customers. A negative CCC represents the number of days a company has received cash from customers before it must pay its suppliers. Cash businesses might have a low or negative CCC, while most conventional businesses have a positive CCC.

Ways to shorten your CCC

Here are three ways to reduce the amount your business has tied up in working capital:
1. Collect receivables faster. Possible solutions for converting accounts receivable into cash faster include: tightening credit policies, offering early bird discounts, issuing collection-based sales compensation and using in-house collection personnel. Companies also can evaluate administrative processes — including invoice preparation, dispute resolution and deposits — to eliminate inefficiencies in the collection cycle.

2. Reduce inventory levels. The inventory account carries many hidden costs, including storage, obsolescence, insurance and security. Consider using computerized inventory systems to help predict demand, enable data sharing up and down the supply chain, and more quickly reveal variability from theft.
It’s important to note that, in an inflationary economy, rising product and raw material prices may bloat inventory balances. Plus, higher labor and energy costs can affect the value of work-in-progress and finished goods inventories for companies that build or manufacture goods for sale. So rising inventory might not necessarily equate to having more units on hand.

3. Postpone payables. By deferring vendor payments when possible, your company can increase cash on hand. But be careful: Delaying payments for too long can compromise a company’s credit standing or result in forgone early bird discounts. Many organizations have already pushed their suppliers to extend their payment terms, so there may be limits on using this strategy further.

Make working capital a priority

Some businesses are so focused on the income statement, including revenue and profits, that they lose sight of the strategic significance of the balance sheet — especially working capital accounts. We can benchmark your company’s CCC over time and against competitors. If necessary, we also can help implement strategies to improve your performance without exposing you to unnecessary risk.