Shaping Up Your Accounting Function

by Francis X. Ryan, CPA
Pursuit, October 2006

CPA services to clients, employers and the public are under heavy scrutiny. Still, the public continues to demand that CPAs become more involved in business rather than simply account for it. This expanded role, under ever-more skeptical eyes, is prompting CPAs to redefine the profession and shape up the accounting function.

Adhering to Customer Expectations
To shape up our financial and accounting functions, we must first understand our customers' expectations. How our customers perceive the CPA's role is defined by a "product concept." If we don't understand what our customers want, they will find their accounting solutions without us.

Our customers' product concept demands fair, honest, and accurate financial reporting that supports decision-making, safeguards organizational assets, and protects intellectual property. This product concept requires an accounting function that is fully capable of the recording, reporting, analyzing, controlling, and minimizing enterprise risk.

Components of the Accounting Function
Accurate and timely recording of financial transactions is the absolute minimum standard for an accounting function. The recording function needs to follow a process flow analysis for every accounting function. Process flow mapping helps to ensure that the process is sound, accurate, and timely, and that the company's system of internal controls are consistently recording financial activities. Processes for recording should be streamlined and documented to ensure that each activity is under control. Does your revenue recognition process ensure that all sales are recorded and billed? If not, the recording process is inherently flawed and needs to be corrected.

The CPA's reporting activity must include timely reporting of trends related to a company's critical success factors. A critical success factor is any activity with significant consequences such as those that drive cost, banking, or the company's source or funds. Every CPA and accounting organization should identify critical success factors, develop corresponding operational benchmarks, and include those items in daily, weekly, and monthly financial reporting.

The analysis of trends and benchmarks that allow a company to stay the strategic course is the next important function of the accounting process. Methods for conducting this analysis include governance ratios, critical success factors and cost-driver analysis, among others. Examples of governance ratios are the cash conversion cycle, the return on equity (DuPont formula) model, and the economic- and market-value-added concepts. These ratios provide metrics that alert firms to deviations from the strategic course at the earliest possible time.

Financial benchmarks and operational metrics that measure and control performance are critical elements of a sound accounting organization. Control tools allow a company to manage its business by providing timely performance feedback and proactive adjustments that allow the firm to safeguard its assets. Ideally, operational benchmark should be developed for every critical success factor and cost driver, and be reported daily. Examples of operational measures include employee turnover, headcount, sales orders, hours billed or product shipped, returns, allowances, purchase orders released, customer complaints, bids won and lost, among others.

Planning and analysis that enables a company to monitor all of its critical risks is the final, fundamental accounting function element. Enterprise risk management is similar to the risk factors identified in a 10-K. A similar analysis is beneficial for all public and private firms as well as nonprofits and governmental agencies. The understanding of risk includes critical success factors, cost drivers, process flow analysis of critical corporate processes, and the product concept. A thorough understanding of these business elements increases the likelihood of success.

Organizing the accounting function to accurately report, analyze, control, and minimize enterprise risk will enable financial professionals to best meet customer expectations. These processes will help the CPA profession maintain its position as a premier provider of critical information for sound and prudent organizational decision-making.

“Mr. Ryan is one of the most gifted presenters I have heard. His use of real-life examples and his enthusiasm made the topic extremely interesting.”
– Charlene T. Decker, CPA
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