I frequently run into companies whose accounting departments have developed a talent for posting a lot of transactions followed by reversals of these transactions then posting of additional (supposedly corrected) sets of transactions, replacing the flawed ones.
These usually range from customer invoices with errors such as incorrect sales tax or freight, incorrect accounting for customer deposits and other issues, to incorrectly posted inventory receipts or incorrectly posted issues of material and labor to manufacturing work orders. Even manual journal entries often exhibit this behavior. Sometimes this process repeats itself several times until the correct transactions are successfully recorded.
Since accounting systems are set up to provide an audit trail of everything that was recorded, you often see many items (e.g., customer invoices, received inventory items, adjustments to GL account balances, etc.) that should not be there in the first place. The obvious effect is a lot of unnecessary clutter in the accounting system, more difficult access to the information you need and cumbersome and longer audits.
Many know the woodworking phrase “Measure Twice, Cut Once”. When you cut pieces of wood to be used in projects or construction it is common sense to verify your measurements, which should result in a correct mark on the piece to be cut. Don’t do it and you risk cutting the piece too long or too short, having to redo your work and wasting material and time in the process.
I think this principle should also apply to accounting transactions. For example, when you prepare manual journal entries to be posted to your general ledger, make sure all amounts, GL accounts and orientation (Debits and Credits) are correct. If you use an upload template or worksheet this can be entered in the template and reviewed along with other batch journal entries for accuracy and completeness.
If your internal controls dictate (as they should) that all batch entries must be reviewed and approved by someone who did not prepare them, and this control is performed effectively, then you have fulfilled this principle. Of course, the reviewer must have some familiarity with the type of transactions they are reviewing and actually conduct the review rather than simply “rubber stamp” the entry as approved for posting.
Many small organizations do not have a formal internal control framework, which is intended to mitigate risks to financial reporting. Most of these organizations have issues with segregation of duties where one or more persons perform multiple tasks that should be completed under the preparer – reviewer set of controls (where the reviewer is never the same person who prepared the entries) in order to mitigate the risks of having material errors in transactions or financial fraud.
If one person is tasked, for example, in preparing and also posting manual journal entries to the general journal, I strongly suggest that the proposed entries be entered into an upload worksheet with all GL accounts properly listed, comments entered for each line and also in the journal header. All amounts on each line must be properly verified. Make sure your debits and credits are correctly oriented and that the sum of all credits perfectly matches the sum of all debits.
Adding comments and explanations to entries, as well as references to worksheets and data files where entries can clearly be substantiated is highly recommended. Experience shows that these comments can save a substantial amount of time when these entries are reviewed later on. Have you ever been in a situation where you were struggling to understand and explain your own entries to managers or auditors? The little extra work you put in when making the entries will someday pay off handsomely.
As an extra step of caution, I often suggest that these JE batches be uploaded to the GL and not immediately posted (assuming you do both – not great but a common practice in small business). Let it sit there for a day, then come back to it and if everything still looks good than you can push that “post” button. A lot of unnecessary GL detail clutter can be eliminated this way.
This may seem trivial and unnecessary advice, but I have never seen a general ledger that did not have flawed entries followed by reversals and reposting of correct entries. Some of the GLs I regularly review contain excessive amounts of such transactions where the relevant detail is buried in transaction clutter. The same is true in sub-ledgers (e.g., AR, AP, Inventory), all leading to many additional transactions, attempting to first reverse and then correct the original flawed entries.
Now imagine you don’t catch these errors, occasionally resulting in material errors in financial statements, so always remember the saying “Measure Twice, Cut Once”.
Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publically held companies in the Hi-Tech industry, such as Hybrid Arts, Inc., Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.
Combining his skills and experience in engineering with deep understanding of technical accounting, he is able to assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.