The Essential Controller

An Introduction to What Every Financial Manager Must Know

Steven M. Bragg

• Publisher: Wiley
• Year: 2012
• ISBN:
  9781118239735
• Edition: 2
• Topic: Commerce
• Subtopic: Comptabilité de gestion

Quick-reference guidance showing new controllers how to enhance performance while avoiding pitfalls

Designed to give new controllers a firm foundation in the concepts of managing the accounting department, locating GAAP information, and analyzing and knowing what to do with key accounting information, The Essential Controller, Second Edition is the invaluable primer you can turn to for the foundation you need to succeed. Whether your business is large, small, or medium-sized, this volume provides a complete overview of the controller's responsibilities and the role that today's controllers should be playing.

• Offers new coverage of finance strategy
• Updates taxation strategy
• Includes a new controller checklist
• Quick reference guide that controllers can turn to
• Also by Steven M. Bragg: The Controller's Function: The Work of the Managerial Accountant, Fourth Edition

The Essential Controller, Second Edition is the go-to handbook that you will use every day for dealing with the everyday issues facing today's controllers.

CHAPTER ONE
Accounting in the Corporation

Importance of This Chapter

Though this chapter is relatively short, the new controller should read it carefully and ponder the key topics of discussion. We point out that the accounting function is extremely complex, both in terms of tasks and global reach as well as in its impact on other parts of the business. In many respects, the controller position has the most far-reaching impact of any management position, so the new controller must spend time considering how he or she will fit into the complex gearing of the modern corporation in order to achieve the greatest positive impact. Further, ethical issues arise more frequently in the accounting field than in most other areas, so the controller must be aware of these issues and understand the process for dealing with them.

The role of the accounting staff used to be simple enough—just process a basic set of accounting transactions and convert them into financial statements at month-end. The role has undergone a vast change in the last few decades, as technological improvements and a shifting view of management theory have resulted in a startlingly different accounting function. This chapter describes how the accounting function now incorporates many additional tasks and can even include the internal auditing and information technology functions in smaller organizations. It then goes on to describe how this functional area fits into and serves the needs of the rest of the company, and how the controller fits into the accounting function. Finally, there is a discussion of how ethics drives the behavior of accounting employees, and how this shapes the way the accounting staff and controller see their roles within the organization.

In short, this chapter covers the high-level issues of how the accounting function and its controller fit into the modern company, not only to process its transactions, which was its traditional role, but also to provide additional services.

TASKS OF THE ACCOUNTING FUNCTION

The accounting function has had sole responsibility for processing the bulk of a company’s transactions for many years. Chief among these transactions have been the processing of customer billings and supplier invoices. Though these two areas comprise the bulk of the transactions, there has also been a long history of delegating asset tracking to the accounting function. This involves all transactions related to the movement of cash, prepaid assets, inventory, and fixed assets. Finally, the accounting staff has been responsible for tracking debt, which can involve a continuous tracking of debt levels by debt instrument, as well as the payments made to reduce them.

A multitude of changes in the business environment have altered the role of the accounting function. One change has been the appearance of the information technology function. In a larger company, this function is managed within its own department and does not fall under the responsibility of the controller. However, it is common for the information technology group to fall under the management umbrella of the controller in a smaller company. Likewise, the internal auditing function frequently falls under the controller’s area as well. This function has expanded in importance over the last few decades as companies realize the benefits of having an internal watchdog over key controls. Though it should report directly to the board of directors or the chief financial officer (CFO), it is common for a small internal auditing staff to report instead to the controller.

Besides adding new functional areas, the accounting staff has other new responsibilities that have arisen due to the increased level of competition. With worldwide barriers to competition crumbling, every company feels the pinch of lower competitive prices and now asks the accounting staff to provide analysis work in addition to the traditional transaction processing. These tasks include margin analysis on existing or projected product lines, geographic sales regions, or individual products.

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Targeted Financial Analysis

One of the controller’s key tasks is proactively analyzing company issues and recommending changes. In one case, a new controller solved a company’s low-profitability problems by preparing a one-page grid showing the sales volume and profitability of every customer. The president promptly dropped most of the customers having low volume and low margins, resulting in the company deliberately losing 1/3 of its customers—and raising its profitability.

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Also, different organizational structures complicate the job of the controller. For example, there may be a number of subsidiaries that were created specifically to reduce the taxes on newly acquired businesses, or to take advantage of tax rates in different government jurisdictions. These situations greatly complicate the accounting work of the accounting staff, particularly in regard to consolidating the results of the various entities.

There are also continuing changes to the various accounting frameworks, such as generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS), which require considerably more complicated accounting for some situations. For example, the controller may be called on to capitalize the interest expense associated with a fixed asset under construction, or to accrue a liability for an asset retirement obligation.

In addition, the accounting staff may even be asked to serve on new product design teams, so that they can determine the projected cost of new products, especially in relation to target costs. Further, the accounting staff must continuously review and report on nonproduct costs, which can range from advertising to utilities. This level of cost review and reporting calls for highly trained cost accountants and financial analysts, almost always with college degrees and professional certifications, to conduct the work.

The world of business has become more international. Many companies are doing an increasing volume of business with companies based in other countries. This greatly increases the complexity of accounting, for a company must now determine gains and losses on sales to other countries. In addition, if there is no separate finance function, the accounting staff may be called on to handle letters of credit and hedging transactions that are designed to reduce the level of risk that goes with foreign exchange dealings.

In the face of more intensive competition, many companies are also merging or acquiring subsidiaries. This adds a great deal of complexity to the accounting staff’s work, for it must now coordinate a multitude of additional tasks in other locations. This includes setting up standard procedures for the processing of receipts, shipments, and cash. Also, closing the financial books at the end of each reporting period becomes much more complex, as the accounting staff must now coordinate the assembly and consolidation of information from multiple subsidiaries. Even if a company decides to consolidate all of its accounting facilities into one central processing location to avoid all this trouble, it still requires the management expertise to bring together the disparate accounting systems into a smoothly operating facility. This is not an easy task. The environment of mergers and acquisitions greatly increases the skill needed by the accounting staff.

The tasks of the accounting function are itemized below. The tasks that belong elsewhere—but are commonly given to the accounting staff in a small company—are noted under a separate heading.

• Traditional accounting tasks
  • Accounts payable transaction processing
  • Accounts receivable transaction processing
  • Asset transaction processing
  • Debt transaction processing
• New accounting tasks
  • Coordination and consolidation of accounting at subsidiaries
  • Currency translations
  • Margin analysis
  • Nonproduct cost analysis
  • Selection, implementation, and operation of accounting software and related systems
  • Target costing
• New tasks assigned to the accounting function of smaller companies
  • Information technology systems installation and maintenance
  • Hedging, foreign exchange, and letter of credit transactions
  • Internal auditing programs

Given today’s highly volatile and ever-changing business environment, the only safe statement to make about the new activities presented in this section is that they will only become more complex, requiring even greater levels of skill by the accounting staff and its management team.

ROLE OF THE ACCOUNTING FUNCTION

Having noted the expanded number of tasks now undertaken by the modern accounting function, it is important to also note how the role of the accounting staff has changed in relation to the rest of the company.

When the number of accounting tasks was more closely defined around transaction processing, it was common for the accounting staff to be housed in an out-of-the-way corner of a business, where it would work without being impeded by other functions. Now, with a much greater number of tasks, the accounting staff finds itself involved in most major decisions. For example, the cost accountant is expected to serve on product design teams and to let other team members know if new designs will have costs that will meet targeted cost goals. An accounting analyst may be asked by the sales manager to evaluate the profitability of a lease deal being extended to a customer. The controller may be involved in integrating the accounting functions of an acquired business. The accounts receivable clerk may work with the sales staff to collect overdue invoices from customers. And in general, the entire accounting staff may be called on to issue financial reports to other parts of the business,...