Should a catastrophic loss occur to a client or your employer where records or assets have been destroyed, CPAs are uniquely qualified to provide assistance and add value above and beyond the other critical services they provide. This value, however, doesn’t have to wait for a fire, flood, collapse, or some other horrible event to occur. In fact, it probably should not wait. There are things that can be done prior to a loss that will help make the recovery process a smoother one for all.
Current backup of the general ledger, receivables, payables, financial statements, fixed-asset ledger, and just about any other accounting-related document should be standard practice. Not only should this be done as a part of regular day-to-day operations, but it also should be kept off-site. With cloud-based technology readily available, saving and restoring information from the cloud is a great way to accomplish this.
Having a recently completed backup that can be accessed remotely will give your employer or client a great starting point from which to begin reconstructing accounting records, not only to return to normal operations but also in an attempt to recover any losses that may be covered by insurance.
Complete and Accurate Records
Maintaining complete and accurate records may seem obvious, but sometimes those who prepare accounting entries under tight time constraints include only the necessary information and leave off some level of detail in the name of efficiency. This happens. Just know, though, that the time you save now may come back to haunt you later.
When restoring records from a back-up, the more complete and accurate those records are the better. In determining a client’s loss of property, equipment, and inventory, complete and accurate information will help you determine the age, condition, or useful life of assets, identify invoice numbers, or check numbers to request information from third parties.
Even if certain records have been destroyed, details in the accounting records can help you locate documentation from others to more fully support a claim for loss.
Since there is no way of knowing when a catastrophic event is going to happen, the best way to be prepared is by establishing good habits of creating and maintaining records that will be useful if something does go wrong.
General Ledger Codes
Accounting personnel are going to be called upon to record the ongoing business activity, as well as any activity related to the recovery of the business.
It is important to keep these two activities separate. Many insurance policies will reimburse for net income that would have been earned plus continuing normal operating expenses, as well any extra expenses incurred because of the loss event.
To keep operating expenses separate, the CPA should set up separate general ledger codes for any expenses specifically related to the event causing the loss. Catastrophic events sometimes take months, or even years, to resolve, and relying on someone’s memory for the related expenses is not a best practice.
If separate general ledger accounts are set up it will be much easier to deter-mine which expenses were related, regardless of how long it takes to resolve.
When faced with incurring expenses due to a catastrophic event, some may be similar to normal operating expenses and some may not. For example, rent may not be a normal expense for a business, but rent for replacement office space may be an extra expense that would be recoverable.
Make sure post-event documentation includes information that can help determine the necessity of the expense. Extra expenses for overtime, meals, travel, supplies, and so on do not always include the reason for the expense, the person incurring it, or other information that would be helpful in seeking recovery. By documenting the details for these expenses, a CPA can help support the necessity of the expense and aid in the recovery efforts.
Before a catastrophic event occurs, a CPA can preemptively provide assistance to an employer or client. They may not realize it on a day-to-day basis, but they certainly will value the effort after such an event, should one occur. By implementing these suggestions, a CPA will better help recovery efforts and enable a business to return to its preaccident state. So, unless you can predict the future and will know before such an event occurs, follow these suggestions. If something does happen, you will be a little more prepared to handle it.
Jeffrey T. Willoughby, CPA, CFF, CFE, is a director at Forensic Resolutions Inc., which has offices in Haddonfield, N.J., and Philadelphia, Pa. He can be reached at firstname.lastname@example.org.