Imagine a company started by a struggling entrepreneur: it began with one accounting staff, likely a non-CPA, and used Excel spreadsheet, largely a manual system. In the beginning, the attention of the business owner would primarily be focused on producing quality products or the efficient delivery of services, as well as developing and growing its client base. Over the years, the business has succeeded and expanded into an operation that now has more than 20 branches with a significantly much higher volume of transactions. However, its accounting group has likely remained lean, still employing a manual accounting system.
This story is not uncommon. Most businesses see their front office, sales and operation units or the units generating revenues as priority areas for resources and funding. On the other hand, the back office, the accounting unit – the one that tracks information after the operations have generated revenues and incurred expenses, is considered a cost center and thus, receives the least allocation in funding.
Because of this mindset, it is not surprising that business owners wake up one day finding their financial records in disarray and the financial reports either lacking or unreliable, or both. Common signs that indicate problems in the accounting group would include, among others, missing or unavailable financial reports or basic financial statements; months of backlog in transaction records; various unsupported transactions; unreconciled general ledger and subsidiary ledger; and a lack of or substantially delayed bank reconciliations.
The lack of attention to the proper and timely accounting of business transactions has significant consequences. Management is not properly guided when making business decisions, resulting in foregone opportunities or bad decisions that could lead to losses. Reliance on cash flow reports or the movements of funds in the company’s bank accounts, which are used as an alternative basis for assessing the business’ position, poses dangers to decision-making. In this scenario, business owners usually fail to consider other critical aspects affecting the business such as contingent liabilities, unrecorded obligations. Likewise, fraudulent transactions within the organization may go undetected when accounting records are not in order.
The lack of proper accounting records is also one of the reasons why companies are unable to comply with their tax obligations. The business is likely to be very vulnerable and unprepared for any examination by the tax authorities.
As a Firm, we have always advocated maintenance of proper accounting records. We always believe that management will have a better picture of the company’s current financial status and will make better informed decisions of the future when the financial records are updated, prepared on time and in order.
It is, thus, pleasing to see an increasing number of businesses that are realizing the value of maintaining proper accounting records. They engage accounting professionals to help them fix and keep their books in order. While updating financial records generally takes time and requires investment, companies now understand that not having accurate financial information is risky and may result in more costly business decisions in the long run.
The participation of the younger generation in family-owned businesses has also paved the way for the founding members of family to consider infusing new technology and professional consultants into their operations. Increasingly, these new generations of business owners are able to convince their parents that the way of doing business has now evolved and, to be competitive, finance and accounting practices must not only efficiently record the results of operations and financial condition of the company but also provide critical information for a more accurate analysis of customer behaviors and needs.
The transformation of these companies has several benefits – some companies are finding it easier to access financing and some are even able to launch an IPO. With better quality financial reports, decision-making by the management improves significantly.
Clearly, the accounting unit of a business organization is no longer seen as a cost or just a back office but as a necessary support group enabling the operations to achieve its strategy. We have seen companies that took the hard route to keeping their records updated and reliable, and several companies that regressed or decided to continue doing things the old way as the cleaning-up process took its toll. Those that took the hard road found the path to success.
Chris Ferareza is a Partner, Audit & Assurance and In-Charge of Training at P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firm in the Philippines, with 20 Partners and over 700 staff members.
As published in The Manila Times dated 23 March 2016