Accounting and Finance Policies & Procedures Discussion Document
ACCOUNTING POLICIES Table of ContentsWhy Policies and Procedures are ImportantPolicy vs. ProcedurePolicy and Procedure OverviewWhat makes a good accounting Policy and Procedure?What are the characteristics of a good “Accounting Policy and Procedure Set”?Suggested format and typical policy listApproach
WHY POLICIES AND PROCEDURES ARE IMPORTANTThe rules by which companies must conduct business have changed and aresubject to new rules and requirements. With numerous companies changing theirprocesses to meet demands, supportive Policies & Procedures are paramount tosuccess.For companies to operate and be in compliance with the new, changing andevolving rules, companies need to have an up to date suite of policies andassociated procedures.An up to date and complete suite of polices ensure that A proper control framework is established Operating managers understand the “rules of the road”
WHY POLICIES AND PROCEDURES ARE IMPORTANT,CONTINUEDCompanies have always had polices and procedures, but one of the learningsfrom SOX documentation process is policies; do not reflect the latest rulings and required accounting treatments – even though the company may be following the rules ( amortization of goodwill, accounting for derivatives, etc) policies on standard topics such a signatory authorization do not reflect the current organizational structure general policies on Accounts Payable, Accounts receivable and other such accounting areas do not reflect the latest system sources (new ERP or consolidation system)
WHY POLICIES AND PROCEDURES ARE IMPORTANT,CONTINUED With an renewed focus on controls, finance and operational professionals look to the Corporate polices to provide guidance in their decision making and without a firm stake in the ground, individuals are left to make decisions using their own judgment and understanding of the topic Polices and procedures must also be readily accessible, consequently the thick binder of policies sitting on a shelf is not going to foster an environment where the polices are going to be adhered to and makes the enforcement considerably more difficult.
ACCOUNTING POLICIES VS. PROCEDURESWhat is the difference between a Policy and Procedure?Policy : • Long-lived – should seldom change • Not open to interpretation • Sets the standard for how business is to be conducted • Not constrained or dictated by the current business environment • Has global/enterprise application In rare cases, a policy and procedures may be combined to ensure consistent application across the enterprise – such as for inter-company accounting
ACCOUNTING POLICIES VS. PROCEDURES, CONTINUEDWhat is the difference between a Policy and Procedure?Procedure: • Usually left up to local management • Provides the Who, What, Where, When and How • Enables continuous improvement by providing a tactical roadmap which can be improved upon as time passes • May be system/application dependent, by including specific references
POLICIES & PROCEDURES: OVERVIEWWhat are “Policies & Procedures” (P&P)?P&P are the “standards” that enterprise management has established, set down inwriting, and made widely available to all those with the need to know. Clear P&P’s reduce time wasted questioning another’s judgment; Rules for key transactions are stated “in black and white”; The existence of P&P can provide evidence to audit committees and others of an “organization in control”.
POLICIES & PROCEDURES: OVERVIEW, CONTINUED What do Policies & Procedures do for an Enterprise?Control: P&P can help management insure transactions are executed in accordance with their general or specific instructions;Productivity: With P&P, people will not have to “reinvent the wheel” to find the proper treatment each time a similar issue arises;Leverage Policy and Procedures development can leverage the expertise ofExpertise: the company’s best people on a subject anywhere in the world;Communication: P&P enable people to easily locate the answer in a hurry;Consistency/Stand With P&P, the same transaction will be treated the same way acrossardization: the enterprise; further, standardized practices set the stage for achieving savings from shared service centers, and enable companies to get the most out of their systems and technology;Official and Ling- P&P carry more weight than a memo – especially if the memolived: writer is no longer around;Education: The P&P web site can be a place where new people learn the key company standards;
POLICIES & PROCEDURES: MISCONCEPTIONSMisconceptions about Policies & Procedures: P&P create bureaucracy, slow the business down, stifle entrepreneurial spirit: •Properly designed P&Ps enable managers to channel their entrepreneurial efforts to areas where there is the potential to find a competitive edge, and not waste their efforts in areas where there is little opportunity. These latter functions should instead be done in the standardized, efficient manner company-wide. P&P do not fit a decentralized management structure: •The advantage of a decentralized management structure is to provide the local manager with the flexibility to make decisions in the key areas of success for their particular business. This does not include the ability to waste valuable resources in areas where company-wide standards will yield the most cost-effective solution.
POLICIES & PROCEDURES: MISCONCEPTIONS,CONTINUEDMisconceptions about Policies & Procedures: Senior/executive management can’t dictate Policy and Procedures – they don’t understand the “front-line issues”: •Corporate-wide policies should be created as a team effort with those “front-line” people having the opportunity to provide input and review for practicality prior to official issue.
POLICIES & PROCEDURES: COMMON PROBLEMSSome Common Problems Companies have in the Policies and Proceduresarea: P&Ps are not kept up to date P&Ps are not readily accessible P&Ps are written for the accounting and finance professional and are not easily understood by non-financial professional P&Ps do not reflect a global business and do not reflect, address or may allowance for local customs Reliance on memos – which are lost, disregarded after a while, may not be clear or well thought out before being distributed, author has left the position or the company Too many duplicative Policy and Procedures sets – one for each division, one at corporate, one for each geography, etc. Policies are not cross referenced to provide a more detailed understanding of the topic – e.g. a policy on capital appropriation should reference the policy on signature authorization Mergers & acquisitions – failure to integrate P&P
WHAT MAKES GOOD ACCOUNTING POLICY? Concise Written in simple language and not filled with acronyms and technical terms Specifies management and fiscal accounting requirements and responsibilities (where appropriate) Specifies the accounting treatment in general terms As necessary, delineates periodic and annual activities May include a summary or highlights section for longer more detailed policies Provide guidance on conceptual and theoretical matters to facilitate practical application (e.g. Company Policy is that fixed asset have zero salvage value) Make it “easy” to enforce – do not create situations where one is called upon to question management judgment Logical groupings of policies, either by topic (sales accrual) or by the components of the business cycle (revenue, expenditure, intercompany, etc.)
WHAT MAKES GOOD ACCOUNTING PROCEDURE? Specific with references to systems, organizations, positions, timetables and approvals Written in simple language and not filled with acronyms and technical terms Written locally by the individuals responsible for the activity and reviewed and approved by local management Specifies management and fiscal accounting responsibilities in detail Illustrates the proper accounting treatment and may include examples of journal entries or “T Accounts” Details day and time of requirements when necessary Provide technical reference on topics and reference the applicable policy (s) Make it “easy” to enforce – do not create situations where one is called upon to question operational managements judgment Logical groupings of policies, either by topic (sales accrual) or by the components of the business cycle (revenue, expenditure, intercompany, etc.) Does not include specific names or other references that may change very frequently
ACCOUNTING POLICIES AND PROCEDURESSuggested Format Title and Number Date Issued, Date Revised Objective Scope Policy and/or Procedures Summary Policy and/or Procedures Detail Exceptions (may be needed for only a few policies and where the policy may conflict with local statutory regulations) Responsibilities Definitions (applicable to the Policy and Procedures) References Appendices
CHARACTERISTICS OF GOOD ACCOUNTING P&P’SWhat are characteristics of good “Accounting Policy and ProceduresManagement”?: Policy and Procedures Set is complete – a Policy and detailed Procedure exists for each key area Polices are up to date and reviewed on a regular schedule • Business or Accounting Changes are routinely incorporated • If a Policy and Procedures is planned, provide a date when it will be available Readily accessible (e.g. Website)
CHARACTERISTICS OF GOOD ACCOUNTING P&P’S,CONTINUED There is a formal process for Policy and Procedure development/update that allows the entire company to be involved. • Focal point for requests for the development of a Policy or Procedure on a specific topic • Predefined process for drafting, reviewing and approving policies • Prioritization process (e.g.) • First priority may be assigned to policies which must be executed at subsidiaries and remote locations (e.g. revenue recognition) • Second priority may be those topics/subjects that are performed at corporate under direct control (e.g. accounting for stock options)
ACCOUNTING POLICIES, CONTINUED Policies should be clearly identified as such Policies should be Separate from other general financial information and clearlyidentified Policies should not be commingled with other materials or incorporated intogeneral communication.such as: These things tend to be • System descriptions and procedures updated frequently, where policies are more long-lived. • Organization charts or announcements • News articles • Closing schedules • Internal control standards • Others
A Recommended Policy List – Starting Point Capitalization of Softw are for Internal UsePolicy Balance Sheet Account Reconciliations Capitalization of Softw are to be SoldExpenditures Policies Annual Balance Sheet Review s Purchased IntangiblesExpenditures – general Management Representation Letters Equity InvestmentsAccounts Payable Back-up Contingency Plans Impairment – non-physical assetsBusiness Expense Policy Unclaimed property (Escheat) Topics & SubjectsCommissions Charitable contributions Foreign Corrupt Practices ActVacation Monthly/Quarterly/Annual Reporting International shipment compliancePrepaid expense Income Taxes Finance Function Quality SystemDebit memos Consolidations Records RetentionLiability & expense accruals FX Gain/Loss Revenue Cycle PoliciesEmployee benef it Intercompany transactions & account reconciliations Revenue RecognitionTaxes not based on Income Global Treasury/hedges Discounts and Allow ancesIncome Taxes Risk Management Def erred Revenue and Cust. AdvancesProperty, Plant & Equipment Transfer Pricing Cash Receipts Cutof fCapital Appropriations T&E Early payment discounts Insider TradingCapitalization of PP&E Credit and Collection Policies Internal AuditDepreciation of PP&E Granting of Customer Credit Business EthicsRetirement & Disposition of PP&E Accounting f or Bad Debts Signature MatrixPhysical Inventory of PP&E Financial Reporting and Accounting Alphabetical IndexImpairment of PP&E Consolidation Account Def initions Translation of foreign CurrencyLease vs. Buy Posting Account Def initions Capitalization of InterestInventory & Cost Accounting Currency Accounting & Reporting Approval of Incentive PlansInventoriable costs Interim (Quarterly) Fin’l Reporting Pension & Severance PlansProduct Standard Cost Interdivisional w arranty ReservesInventory provisions and related valuation reserves Accounting f or Stock Options Information systems – Disaster recoveryInventory disposition and w rite-of f Employee stock purchase plan accounting Transactions w ith employeesProduct w arranty Research & Development Allocation of costs to Business UnitsPhysical inventory taking Accounting f or Contingencies and other accrued liabilities Allocation of Corporate O/HCycle counting of inventory Non-Monetary Transactions Demo/LoanAging of inventory accounts Intercompany AccountingCustomer inventory Intercompany prof it eliminationBusiness Controls Policies Intercompany accounting: Overall PoliciesCorporate Approval Policy Intercompany reconciliation and balancing processBudget and Forecast Intercompany invoicingBalance Sheet Account Reconciliations Policies on Accounting f or Other Assets:
CORPORATE FINANCIAL POLICY AND PROCEDURE DEVELOPMENTThe following pages depict a 4 phase approach to the development ofpolicies and procedures.Phase 1 – Needs assessment, end-state design, planningPhase 2 – Policy and Procedures draft development cyclePhase 3 – Policy and Procedures review and approval cyclePhase 4 – Implementation & Roll-Out
CORPORATE FINANCIAL POLICY AND PROCEDURESDEVELOPMENTPhase 1 – Needs assessment, design, planning Rationalize the list of policies to be developed Identify subject matter expert for each set of policies and procedures Agree on Policy and Procedures format, level of detail Develop and agree on at least 1 “pilot” policy and procedures Develop project approach and timetable Announce project to the organization; Gain commitment from Subject Matter Professionals and reviewers to make quality time available
CORPORATE FINANCIAL POLICY AND PROCEDURESDEVELOPMENT, CONTINUEDPhase 2 – Policy and Procedures draft development cycle Gather information on each policy and procedures or set from SME • Interview SME • Review existing documents, memos, policies/procedures Prepare a first draft of each policy and/or procedure Review with SME and revise as necessary
CORPORATE FINANCIAL POLICY AND PROCEDURESDEVELOPMENT, CONTINUEDPhase 3 – Review and approval cycle Send draft policy and procedures for review and comment to affiliates and other key impacted individuals Receive comments back, summarize, develop recommended resolutions Review with senior finance for decisions or further analysis Resolution of issues with senior finance
CORPORATE FINANCIAL POLICY AND PROCEDURESDEVELOPMENT, CONTINUEDPhase 4 – Implementation & Roll-Out Final versions of each policy and procedures created Loaded to media (e.g. internal web site) and made available to all personnel Official announcement, effective date Set forth process for adoption by any operating units that will requireaccounting change
CONTACT INFORMATIONKevin J. Duffyduffyri@yahoo.comwww.linkedin.com/in/duffyri
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