Business owners need to be acutely aware of the operational efficiencies of all facets of their company. As part of
this process, they may monitor gross margins when evaluating direct labor and the production team, order generation statistics for the sales team, or lead times when evaluating the engineering and other indirect
But how is the accounting department evaluated? Is the size of the department appropriate given the volume of transactions running through the company? Do the level of internal controls align with the owner’s risk appetite? How accurate are the reports that are being generated?
An accounting department diagnostic is a great tool to help an organization answer these questions. The diagnostic typically focuses on the following six key areas of a company’s accounting:
- Accuracy of information: Assessing the overall accuracy of the accounting output focuses on the quality of the reconciliations, account analysis, and the effectiveness of the day-to-day accounting processes. Other assessment areas include cutoff procedures, valuation of assets and liabilities, and the consistency of recording transactions. A quick barometer of the department’s accuracy is the volume of audit adjustments required each year, or the extent of year-end closing entries versus those made during monthly closes throughout the year.
- Timeliness of processing transactions and reporting: Since accounting data is historical in nature, the speed at which it becomes usable information is critical. This assessment evaluates how quickly transactions are processed, accounts reconciled and reports produced, and measured against data from like-size companies.
- Efficiency of systems, procedures, and processes: Systems that are efficient keep costs down and improve accuracy and timeliness. In addition to evaluating the overall accounting system, assessments are made of the coordination of effort involved in processing transactions. Efficient systems free up time for accounting personnel to do other things like proper analysis, planning, etc.
- Quality of internal controls: Strong internal controls protect the company’s assets from theft or fraud and increase accuracy. A sound internal control structure begins with comprehensive policies and procedures that incorporate sufficient segregation of duties and review controls. In addition to the design of controls, the implementation of said controls is also evaluated.
- Quality of financial reporting and analysis: An accounting system is only as good as the information it produces, which serves as the basis for decision-making. This analysis considers the overall reporting from a daily, weekly, and monthly standpoint and the level of analysis performed on the data.
- Sufficiency of accounting personnel: The evaluation of accounting personnel is listed last not only because of its importance, but also because the previous five assessment areas typically determine personnel evaluation considerations. In addition to the capabilities of the personnel involved, the overall staffing of the department in light of the amount of work required and the size of the company are taken into consideration.
One of the biggest advantages of an accounting department diagnostic is its flexibility, as opposed to traditional service offerings such as audits and reviews. Although an audit can be extremely comprehensive, it’s driven by prescribed auditing standards. While it may touch on the areas noted above, the primary focus of an audit is the accuracy of reporting. Conversely, an accounting department diagnostic can be
tailored to meet the company’s and owner’s needs. It can be focused on any or all facets of the department.