Controllership E-Book

Steven M. Bragg

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 1455

Veröffentlichungsjahr: 2009

Beschreibung

Today's controllers are no longer seen as technicians who process transactions; they are now seen as business executives with a wide-ranging knowledge of total business operations, best practices, and corporate strategy. Providing a comprehensive overview of the roles and responsibilities of controllers in today's environment, this Eighth Edition of Controllership continues to provide controllers and vice presidents of finance with all aspects of management accounting from the controller's perspective, including internal control, profit planning, cost control, inventory, and financial disclosure.

Leseprobe

Table of Contents

Title Page

Copyright Page

About the Author

Preface

PART I - The Broad Management Aspects of Controllership

CHAPTER 1 - Accounting in the Corporation

Tasks of the Accounting Function

Role of the Accounting Function

Role of the Controller

Impact of Ethics on the Accounting Role

Evolving Role of Accounting

CHAPTER 2 - Controller’s Responsibilities

Variations on the Title

Planning Function

Control Function

Reporting Function

Accounting Function

Additional Controller Functions in Smaller Companies

Controller’s Job Description

Relationship of the Controller to the Chief Financial Officer

CHAPTER 3 - Cost Accounting and Costing Systems

Purpose of Cost Accounting Information

Input: Data Collection Systems

Processing: Data Summarization Systems

Processing: Job Costing

Processing: Process Costing

Processing: Standard Costing

Processing: Direct Costing

Processing: Throughput Costing

Processing: Activity-Based Costing

Processing: Target Costing

Outputs: Cost Variances

CHAPTER 4 - Ratio and Trend Analysis

How to Use Ratios and Trends

A Caveat

Measures for Profitability

Measures for the Balance Sheet

Measures for Growth

Measures for Cash Flow

Measures for Nonfinancial Performance

Interrelationship of Ratios

Setting Up a System of Ratios and Trend Analyses

CHAPTER 5 - Internal Control Systems

Objectives

Responsibility for Internal Controls

Examples of Internal Controls

When to Eliminate Controls

Types of Fraud

Preventing Fraud

How to Deal with a Fraud Situation

CHAPTER 6 - Internal Audit Function

Reporting Relationships

Role of the Audit Committee

Internal Audit Objectives

Internal Audit Activities

CHAPTER 7 - Recruiting, Training, and Supervision

Recruiting Sources

Factors to Consider when Recruiting

Factors to Consider When Promoting

Importance of Reduced Turnover

Importance of Developing Career Plans for Employees

How to Motivate Employees

CHAPTER 8 - Controller’s Role in Investor Relations

Objectives of the Investor Relations Function

Communication Vehicles for Investor Relations

Investor Relations Message Recipients

Information Needs of the Financial Analyst

Information Needs of Other Groups

Providing Guidance

Forward-Looking Statements

Organization Structure for Investor Relations

Role of the Controller and Other Principals

PART II - The Planning Function of Controllership

CHAPTER 9 - Business Plans and Planning: Interrelationship of Plans, Strategic Planning

Business Planning Defined

Framework for Business Planning

Time as Related to Planning

Planning Period: How Long Is “Long Range”?

System of Plans

Strategic Plan: An Overview

Corporate Development Plan

Operations Plan

Basic Elements in Any Plan

Planning Process

Plan Frequency

Plan Guidelines

Supplemental Planning: Alternative Scenarios

Planning Timetable or Schedule

Strategic Planning: An In-Depth Review

Environmental Analysis

Critical Success Factors

Business Mission or Purpose

Long-Range Business Planning Objectives

Developing Strategies

Strategies and the Planning Period

Role of the Controller

CHAPTER 10 - Financial Impact of the Strategic Plan: Long-Range Financial Plan

Key Elements of a Strategic Plan

Capital Investments

Risk Analysis

Objectives of the Long-Range Financial Plan

Consolidation and Testing Process

Illustrative Financial Exhibits in the Plan Presentation

Role of the Controller

CHAPTER 11 - Profit Planning: Annual Plan

Purpose of Budgeting

Planning Benefits

Coordination Benefits

Control Benefits

Problems with the Annual Plan

Annual Planning Cycle: Illustrative

Supportive Financial Statements and Budgets

Sales Budget

Production Budget

Purchases Budget

Direct Labor Budget

Manufacturing Expense Budget

Inventory Budget

Operating Expense Budget

Capital Expenditures Budget

Cost of Goods Sold

Statement of Estimated Income and Expense

Cash Budget

Statement of Estimated Financial Condition

Approval of Budget

Linking the Bonus Plan to the Budget

Controller’s Role: A Key Player

Management Approval of the Plan

CHAPTER 12 - Profit Planning: Supporting Financial Analysis for the Annual Plan

General Comments on the Cost-Volume-Profit Relationship

Breakeven Chart

Changes in Sales Revenue

Changes in Sales Mixture

Changes in Sales Price

Changes in Costs

Analysis by Product

Application of Cost-Volume-Profit Analysis

Selecting the Most Profitable Products

Increased Sales Volume to Offset Reduced Selling Prices

Most Profitable Use of Scarce Materials

Advisability of Plant Expansion

Some Practical Generalizations

Program Evaluation Using Discounted Cash Flow

Financial Analysis of Unacceptable Operating Results

More Sophisticated Analyses

CHAPTER 13 - Taxation Planning

Accumulated Earnings Tax

Cash Method of Accounting

Inventory Valuation

Mergers and Acquisitions

Net Operating Loss Carryforwards

Passive Activity Losses

Project Costing

Property Taxes

S Corporation

Sales and Use Taxes

Transfer Pricing

Unemployment Taxes

Management of the Taxation Function

PART III - Planning and Controlling Operations

CHAPTER 14 - General Discussion of Standards

Definition of Standards

Advantages of Standards

Relationship of Entity Goals to Performance Standards

Types of Standards Needed

Trend to More Comprehensive Performance Measures

Benchmarking

Setting the Standards

Use of Standards for Control

Procedure for Revising Standards

CHAPTER 15 - Planning and Control of Sales

Sales Management Concerns

Controller’s Assistive Role in Sales Management Problems

Controller’s Independent Role in the Planning and Control of Sales

Sales Analysis

Sales Planning: Basis of All Business Plans

Steps in Developing the Near-Term Sales Plan/Budget

Methods of Determining the Sales Level

Useful Sources of Forecasting Information

Forecasting the Business Cycle

Sales Standards

Sales Reports

Product Pricing: Policy and Procedure

CHAPTER 16 - Planning and Control of Marketing Expenses

Definition

Factors Increasing the Difficulty of Cost Control

Marketing Expense Analysis

Types of Analyses

Planning Marketing Expenses

Special Comments on Advertising and Sales Promotion Expense

Marketing Expense Standards

CHAPTER 17 - Planning and Control of Manufacturing Costs: Direct Material and ...

Objectives of Manufacturing Cost Accounting

Controller and Manufacturing Management Problems

Types of Manufacturing Cost Analyses

Types of Cost Systems

Direct Material Costs: Planning and Control

Labor Costs: Planning and Control

CHAPTER 18 - Planning and Control of Manufacturing Costs: Manufacturing Expenses

Proper Departmentalization of Expenses

Variations in Cost Based on Fixed and Variable Costs

Variations in Cost Based on Direct Labor

Variations in Cost Based on Batch Size

Variations in Cost Based on Overhead

Variations in Cost Based on Time

Cost Estimation Methods

Normal Activity

Allocation of Indirect Production Costs

Budgetary Planning and Control of Manufacturing Expenses

Securing Control of Overhead

Control with Throughput Analysis

Role of the Controller

CHAPTER 19 - Planning and Control of Research and Development Expenses

R&D Activities in Relation to Corporate Objectives

Organization for the R&D Financial Functions

Elements of R&D Costs

Role of the Financial Executive in R&D

Determining the Total R&D Budget

Establishing the R&D Operating Budgets

Detailed Budgeting Procedure

Other Control Methods

Effectiveness of R&D Effort

CHAPTER 20 - Financial Planning and Control in a Service Company

Data Classification

Cost Accounting in a Service Organization

Planning System

CHAPTER 21 - Planning and Control of General and Administrative Expenses

Components of G&A Expense

Control over G&A Expenses

Reducing G&A Expenses

Spend Management Systems

Budgeting G&A Expenses

CHAPTER 22 - Payroll

Improving the Payroll Process

Compensation

Federal Income Taxes

Social Security Taxes

Medicare Tax

State Income Taxes

Payroll Taxes for Employees Working Abroad

Remitting Federal Taxes

Payroll Deductions for Child Support

Payroll Deductions for Unpaid Taxes

Unemployment Insurance

PART IV - Planning and Control of the Balance Sheet

CHAPTER 23 - Planning and Control of Cash and Short-Term Investments

Objectives of Cash Planning and Control

Duties of the Controller versus the Treasurer

The Cash Forecast

Cash Collections

Cash Disbursements

Internal Control

Reports on Cash

Cash Flow Ratio Analysis

Variations in Cash Requirements by Industry

Investment of Short-Term Funds

CHAPTER 24 - Planning and Control of Customer Credit and Receivables

Credit Procedures and Systems

Collection Procedures and Systems

Measurement of Accounts Receivable

The Bad Debt Forecast

Budgeting for Accounts Receivable Balances

CHAPTER 25 - Planning and Control of Inventories

Costs and Benefits of Carrying Inventory

Role of the Controller

Material Requirements Planning Systems

JIT Manufacturing Systems

JIT Purchasing

Inventory Purchasing

Production Issues Impacting Inventory

Inventory Quantity Management

Obsolete Inventory

Inventory Cutoff

Budgeting for Raw Materials

Budgeting for Work-in-Process

Budgeting for Finished Goods

Significance of Proper Inventory Valuation

Selection of the Cost Base

CHAPTER 26 - Accounting and Reporting for Selected Investments and Employee ...

Improving the Investment Decision Process

Role of the Controller

Financial Reports on Selected Investments

Accounting and Disclosure Requirements and Practices for Employee Benefit Plans

CHAPTER 27 - Planning and Control of Plant and Equipment or Capital Assets

Controller’s Responsibility

Capital Budgeting Process

Information Supporting Capital Expenditure Proposals

Methods of Evaluating Projects

Payback Method

Operators’ Method

Accountants’ Method

Discounted Cash Flow Methods

Hurdle Rates

Cost of Capital—A Hurdle Rate

Throughput Method

Classifying and Ranking Proposed Capital Projects

Problems with the Capital Budget Approval Process

Using Expected Commercial Value for Project Ranking

Board of Directors’ Approval

Project Authorization

Accounting Control of the Project

Postproject Appraisals or Audits

Other Aspects of Capital Expenditures

CHAPTER 28 - Management of Liabilities

Objectives of Liability Management

Direct Liabilities

Planning the Current Liabilities

Standards to Measure and Control Current Liabilities

Corrective Action

Some Benefits from Debt Incurrence

Standards for Debt Capacity

Leverage

Managing Liabilities: Some Practical Steps

Management of Accounts Payable

Accounting Reports on Liabilities

Internal Controls

CHAPTER 29 - Management of Shareholders’ Equity

Role of the Controller

Growth of Equity as a Source of Capital

Return on Equity as Related to Growth in Earnings per Share

Growth in Earnings per Share

Cost of Capital

Components of Cost of Capital

Calculating the Cost of Debt

Calculating the Cost of Equity

Calculating the Weighted Cost of Capital

Dividend Policy

Other Transactions Affecting Shareholders’ Equity

Long-Term Equity Planning

Short-Term Plan for Shareholders’ Equity

Other Considerations

PART V - Financial and Related Reports

CHAPTER 30 - Internal Management Reports

Rules of Reporting

Status Reports

Margin Reports

Cash Reports

Capacity Reports

Sales and Expense Reports

Payroll Reports

Graphical Report Layouts

CHAPTER 31 - External Reporting

Purpose of the Annual Report to Shareholders

Controller and the Annual Report

General Contents of the Annual Report

Importance of Form

Other Reports to Shareholders

Disclosure Issues

SEC Forms

PART VI - Some Administrative and Special Aspects of the Controller’s Department

CHAPTER 32 - Mergers and Acquisitions

Acquisition Strategy

The Acquisition Process

Locating Acquisition Targets

Due Diligence

Valuing the Target

Legal Documents

Acquisition Integration

Types of Acquisitions

CHAPTER 33 - The Reporting Period and How to Close It

Selecting the Fiscal Year

Selecting the Number of Interim Reporting Periods

Reasons for Accelerating the Closing Period

How to Achieve a Fast Close

CHAPTER 34 - Inventory Tracking

Differences between Perpetual and Periodic Inventory Systems

Setting Up a Perpetual Inventory System

Auditing and Measuring a Perpetual Inventory System

Physical Inventory Procedure

Physical Inventory Complications: The Cutoff

Reconciling Inventory Variances

How to Avoid the Inventory Tracking Problem

CHAPTER 35 - Tax Records and Procedures

Tax Organization

Centralized Tax Department

Functions of the Tax Manager

Tax Communications

Tax Records in General

Tax Calendar

Tax Information Records

Tax Working Papers and Files

Internal Revenue Code and Record Requirements

Proper Classification of Accounts

Other Taxes

Income Taxes and Business Planning

Special Tax Reports

Index

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Library of Congress Cataloging-in-Publication Data:

Controllership, the work of the managerial accountant / Steven M. Bragg. - 8th ed. /

Steven M. Bragg.

p. cm.

Includes index.

Rev. ed. of: Controllership, the work of the managerial accountant / James D. Willson. 6th ed. 1999.

eISBN : 978-0-470-50781-0

1. Managerial accounting. I. Bragg, Steven M. II. Willson, James D. Controllership, the work of the managerial accountant.

HG4026.H43 2009

658.15ʹ11-dc22

2009010887

About the Author

Steven M. Bragg, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte. He received a master’s degree in finance from Bentley College, an MBA from Babson College, and a bachelor’s degree in Economics from the University of Maine. He has been the two-time president of the Colorado Mountain Club, and is an avid alpine skier, mountain biker, and certified master diver. Mr. Bragg resides in Centennial, Colorado. He has written the following books:

Accounting and Finance for Your Small BusinessAccounting Best PracticesAccounting Control Best PracticesAccounting for PayrollAccounting Policies and Procedures ManualAccounting Reference DesktopBilling and Collections Best PracticesBusiness Ratios and FormulasCost Accounting: A Comprehensive GuideEssentials of PayrollFast CloseFinancial Analysis: A Controller’s GuideGAAP Policies and Procedures ManualInventory AccountingInventory Best PracticesJust-in-Time AccountingManagement Accounting Best PracticesManaging Explosive Corporate GrowthMergers and AcquisitionsOutsourcingPayroll Best PracticesRevenue RecognitionRunning a Public CompanySales and Operations for Your Small BusinessThe Controller’s Function: The Work of the Managerial AccountantThe New CFO Financial Leadership ManualThroughput AccountingUltimate Accountants’ Reference

Preface

Since the first publication of this book in 1952, the role of the controller has greatly expanded. It has moved from that of a simple technician who must properly process transactions to a business executive with a wide-ranging knowledge of total business operations, best practices, and corporate strategy. To address these changes, Controllership has evolved into a comprehensive guide to accounting management, planning, controls, processes, and administration—in short, a repository for all the skills that a modern controller needs. While the seventh edition addressed such key issues as ethics, taxation strategy, and business cycle forecasting, we felt it necessary to issue a new edition that addresses a wide range of additional topics that have become more important in the last few years. The following new items are addressed in depth:

• Throughput costing for capital budgeting

• Process-specific controls

• Providing guidance

• Forward-looking statements

• Disclosure issues

• Acquisition strategy

• Acquisition valuation

• Acquisition integration

These new topics address many of the concerns of the modern controller: what specific controls to impose on a company’s key accounting processes, what types of information to reveal to the investment community, and virtually all aspects of the acquisition process.

In short, the eighth edition of Controllership is the complete business advisor for today’s controller.

Steven M. Bragg Centennial, Colorado June 2009

PART I

The Broad Management Aspects of Controllership

CHAPTER 1

Accounting in the Corporation

Before a controller can delve into the specifics of the controller job description, it is first necessary to determine how the accounting function fits into the rest of the organization. This used to be a simple issue; the accounting staff processed transactions to support business operations—period. This required a large clerical staff managed by a small cadre of people trained in the underlying techniques for processing those transactions. In this environment, the stereotypical image of an introverted controller pounding away at a calculator was largely accurate.

The role has undergone a vast change in the past few decades, as technological improvements, the level of competition, and a shifting view of management theory have resulted in a startlingly different accounting function. This section describes how the accounting function now incorporates many additional tasks, and can even include the internal auditing and computer services 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, 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. These have been the transaction-based activities of the accounting staff.

A multitude of changes in the business environment has altered the role of the accounting function. One change has been the appearance of the computer services 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 computer services 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. This function has expanded in importance over the past 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, it is common for a small internal auditing staff to report instead to the controller. It is becoming more common for the computer services and internal auditing functions to be integrated into the role of the accounting staff, especially in smaller companies.

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. 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 a different kind of accounting staff than the traditional kind that did nothing but process large volumes of transaction-related paperwork. It now requires highly trained cost accountants and financial analysts 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. There may even be bartering transactions with organizations that do not have ready access to currency. 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 dealings. All of these issues call for a level of skill that was not required in the days of simple transaction processing.

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

• Operation of accounting software

• New tasks assigned to the accounting function of smaller companies

• Hedging 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 become only more complex, requiring even greater skill by the accounting staff to be accomplished in a manner that is both efficient and effective.

Role of the Accounting Function

Having noted the expanded number of tasks now undertaken by the modern accounting function, it is important also to 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 is frequently asked to sit in on executive committee meetings to give opinions on the cash flow issues for acquisitions or purchases. The accounts receivable clerk may work closely with the sales staff to collect overdue invoices from customers. For these reasons and others, the accounting function now finds itself performing a variety of tasks that make it an integral part of the organization.

A particularly important area in which the role of the accountant has changed is related to processes. When another area of the company changes its operations, which is increasingly common, the accounting staff must devise alterations to the existing systems for processing transactions that will accommodate those changes. For example, if the manufacturing function switches to just-in-time production or computer-integrated manufacturing, this has a profound impact on the way in which the accounting staff pays its bills, invoices customers, monitors job costs, and creates internal reports. Also, if the materials management staff decides to use material requirements planning or integrated distribution management, these new systems will issue information that is of great use to the accounting staff; it should connect its systems to those of the materials management staff to access that information. To alter its processes, the accounting staff must first be aware of these changes, requiring the accounting staff to engage in more interaction with other parts of the company to find out what is going on.

The most historically important role that the accounting staff must change is that of being a brake on other activities. Because most accountants are trained in implementing controls to ensure that assets are not lost, the accounting staff tends to shoot down changes proposed by other departments—the changes will interfere with the controls. The accounting personnel must realize that changes put forward by other functions are not intended to disrupt controls, but to improve the company’s position in the marketplace or to increase its efficiency. This means that some controls must be modified, replaced, or eliminated. It is very helpful for the accounting personnel to have an open mind about altering systems, even when the new systems interfere with the accounting staff’s system of controls.

In today’s increasingly competitive environment, it is very important for companies to develop strong relationships with their key suppliers and customers. These business partners will demand extra services, some of which must be fulfilled by the accounting staff. These changes may include the provision of special billing formats to customers or paying suppliers by electronic transfer. If these steps are needed to retain key business partners, then the accounting staff must be willing to do its share of the work. Too frequently, the accounting staff resists these sorts of changes, on the grounds that all transactions must be performed in exactly the same manner. The accounting department must realize that altering its way of doing business is sometimes necessary to support ongoing business relationships.

Altering the focus of the accounting staff from an introverted group that processes paper to one that works with other parts of a company and is willing to alter its systems to accommodate the needs of other departments is required in today’s business environment. This is in great contrast to the accounting department of the past, which had a minimal role in other company activities, and which was its conservative anchor.

Role of the Controller

The controller has traditionally been the one who manages a few key transaction cycles, monitors assets, and delivers financial statements. Though the details of the position are covered in Chapter 2, suffice it to say here that the position has expanded to a great extent. As noted earlier in this chapter, the accounting function as a whole is now required to take on additional tasks, to work with other departments more closely, to continuously offer advice to senior management, and to alter systems to match the changing needs of other areas of the company. All of these changes have had a massive impact on the role of the controller within the organization.

The key factor is that, due to the vastly increased interaction with other departments, the controller must be highly skilled in interdepartmental dealings. This involves constant interactions with fellow department heads, attendance at a swarm of meetings, and the issuance of opinions on a variety of topics regarding the running of functions with which the controller previously had no connection. Because of this changed role, the controller must now have top-notch interpersonal and management skills—the former to deal with other departments and the latter to oversee the changes needed by the other departments.

In addition, the controller must govern a group of employees that is much more educated than was previously the case. This requires constant attention to the professional progress of each person in the department, which requires goal setting, mutual discussion of training requirements, and continuous feedback regarding employee performance. This clearly calls for management skills of an order far higher than formerly required of a controller who presided over a clerical function.

Also, the wider range of functions managed by the controller now requires a wider range of knowledge. Besides the traditional training in accounting, a controller now needs at least a passing knowledge of computer systems, internal auditing, and control systems. In addition, traditional accounting functions have now become more complex; a controller must know about the increasing complexities of tax laws, Securities and Exchange Commission (SEC) filings, and generally accepted accounting principles. It would take a perpetual student to have an in-depth knowledge of all these areas, so it is more common for the controller to manage a cluster of highly trained subordinates who are more knowledgeable in specific areas, and who can advise the controller as problems arise.

In short, the role of the controller has expanded beyond that of a pure accountant to someone with broad management and interpersonal skills who can interact with other departments, as well as manage the activities of an increasingly well-educated group of subordinates, while also working with them to further their professional careers. This is a much more difficult role for the modern controller, requiring someone with at least as much management experience as accounting knowledge.

Impact of Ethics on the Accounting Role

With the globalization of business, competition has become more intense. It is possible that the ethical foundations to which a company adheres have deteriorated in the face of this pressure. There have been innumerable examples in the press of falsified earnings reports, bribery, kickbacks, and employee thefts. There are vastly more instances of ethical failings that many would perceive to be more minimal, such as employee use of company property for personal use, “smoothing” of financial results to keep them in line with investor expectations, or excessively robust sales or earnings forecasts. The controller and the accounting staff in general play a very large role in a company’s ethical orientation, for they control or have some influence over the primary issues that are most subject to ethical problems—reported earnings, cash usage, and control over assets. This section discusses how the accounting function can modify a company’s ethical behavior—for good or bad.

The accounting function can have a serious negative impact on a company’s ethical standards through nothing more than indifference or lack of caring. For example, if the controller continually acquiesces to management demands to slightly modify the financial statements, this may eventually lead to larger and larger alterations. Once the controller has set a standard for allowing changes to reported earnings, how can the controller define where to draw the line? Another example is when the accounting staff does not enforce control over assets; if it conducts a fixed-asset audit and finds that a television set has been appropriated by an employee for several months, it can indirectly encourage continuing behavior of this kind simply by taking no action. Other employees will see that there is no penalty for removing assets and will then do the same thing. Yet another example is when the accounting staff does not closely review employee expense reports for inappropriate expenditures. Once again, if employees see that the expense report rules are not being enforced, they will gradually include more expenses in their reports that should not be included. The accounting staff has a significant negative influence over a company’s ethical standards simply by not enforcing the rules.

The previous argument can be turned around for an active accounting department. If the controller and the rest of the accounting staff rigidly enforce company policies and procedures and acquire a reputation for no deviations from these standards, the rest of the corporation will be dragged into line. It is especially important that the controller adhere closely to the highest standards, for the rest of the accounting staff will follow the controller’s lead. Conversely, if the controller does not maintain a high ethical standard, the rest of the accounting staff will have no ethical leader, and will quickly lapse into apathy. Accordingly, the controller is a company’s chief ethics officer, for the position has such a strong influence over ethics. It is a rare week that passes without some kind of ethical quandary finding its way to the controller for resolution.

The controller can have an additional impact on the pervasive attention to ethics within the corporation by requiring its consideration as part of the capital budgeting process. The typical capital budgeting form usually includes only numerical considerations, such as the internal rate of return calculation or net present value. At most, it may have a check-off box indicating the need for an asset to comply with safety or government regulations. However, it is possible to add a requirement, in essay form, to discuss any possible ethical violations that may result from acquisition of the asset. This form change will likely require the addition of several examples, such as the impact of the asset acquisition on the local economy, or the need for pollution controls even if local laws do not require them. It may also be useful to consider the ethical impact of not acquiring the asset (i.e., the impact on a local economy if the asset is not installed). This additional information will probably not have an overriding impact on management’s decision to accept or reject an asset purchase, but it will form a part of the multitude of other factors that are considered, and may play some role in the final decision.

It is not sufficient merely to say that the accounting staff must uphold high ethical standards, if the standards are not defined. To avoid this problem, the controller should create and enforce a code of ethics. Some illustrative topics to include in a code of ethics are:

• Bidding, negotiating, and performing under government contracts

• Compliance with antitrust laws

• Compliance with securities laws and regulations

• Conflicts of interest

• Cost consciousness

• Employee discrimination on any grounds

• Gifts and payments of money

• Hazardous waste disposal

• International boycotts

• Leave for military or other federal service

• Meals and entertainment

• Political contributions

• Preservation of assets

• Restrictive trade practices

• Standards of conduct

• Use of company assets

• Workplace and product safety

An especially effective way to drive home to the accounting staff the importance of ethics is to create a set of training exercises, modeled after real-world ethics violations (either from the press or internally). The classes should put employees in the position of making ethics decisions based on the same information available to the people in the case studies. Though ideally the controller personally should run these classes in order to drive home their importance, it is sufficient to have the controller visibly support the classes and attend them. Several organizations offer ethics consulting services, including the Institute for Global Ethics (www.globalethics.org), the Ethics Resource Center (www.ethics.org), and the Markkula Center for Applied Ethics (www.scu.edu/ethics).

Once the code of ethics has been created, it must be communicated to all employees. It is especially helpful if the controller visibly refers to the ethical code whenever an ethical issue arises, so that the accounting staff knows that the controller is decisively adhering to the code.

A code of ethics becomes the starting point in the series of judgments a controller must follow when confronted with an ethical issue. The logical series of steps to work through are:

• Consult the code of ethics. Having a corporate code of ethics is a great boon to the controller, for he or she can use it as the basis for any ethics-related decision. A senior company officer would have difficulty forcing the controller to adopt a different course of action than what is prescribed by the code of ethics, since this would go against a directive of the Board of Directors. If the controller feels it is necessary to take a course of action contrary to what is stated in the code, then the reasons for doing so should be thoroughly documented. If there is no code, then proceed to the next step.

• Discuss with immediate supervisor. The controller’s immediate supervisor is probably either the chief financial officer (CFO), chief operating officer (COO), or CEO. These are the most senior positions in the company, occupied by people whose behavior should be at an ethically high standard. Consulting with them for advice is a reasonable second step in the absence of a code of ethics. However, if the supervisor is the one causing the ethical problem, then skip this step and proceed to the next one.

• Discuss with a trusted peer. There is usually someone within the company in whom the controller places a great deal of trust. If so, consult with this person in regard to the proper course of action. Be more circumspect in doing so with a person outside the company, since this runs the risk of spreading information elsewhere, with possible deleterious consequences. If there is no one with whom to discuss the issue, then proceed to the next step.

• Discuss with the Board’s audit committee. Many boards have an audit committee, which should be comprised entirely of independent directors. If so, the controller should take his or her concerns to this group. Keep in mind that this is a serious step, since the controller is now going around the corporate reporting structure, which may have unenviable consequences later on if the controller has chosen not to tell senior management of this action.

• Consider leaving the company. If all these avenues are untenable or result in inadequate advice, the controller should seriously consider leaving the company in the near future. Reaching this final step probably means that the ethical issue is caused by senior management, and also that there are no outside checks on their ethical behavior, such as an audit committee of the Board of Directors.

Though a well-meaning controller may render justifiable judgments on ethical issues, impacted employees may not feel that their concerns were dealt with fairly. If so, they may be less inclined to bring potential ethics violations to the attention of the controller in the future. To keep this from happening, the company should set up someone in the role of ethics officer, to whom employees can send ethics-related concerns. This person should be positioned outside of the chain of command, so there will be no incentive to ignore ethics complaints in the interests of improving the level of reported corporate performance. Ideally, this could be a person on the audit committee or Board of Directors, or even a completely independent third party. The ethics officer would have responsibility for investigating ethics problems and reporting findings directly to the Board of Directors.

In summary, the accounting staff has a large role in enforcing ethical standards throughout a company, since it has such strong influence over several key areas that require ethical judgments, such as the quality of reported earnings, control over assets, and the uses of cash. Accordingly, it is very much in the controller’s interests to have a code of ethics that the accounting staff can adhere to in enforcing the appropriate ethical standards.

Evolving Role of Accounting

Though there are many variables that can impact the direction of the accounting function and the controller’s role in the future, there are a few broad trends that are likely to continue, and from which one can predict the evolving role of accounting.

The accounting function is in the midst of a fundamental change from being a clerical group without significant training to a cadre of very experienced technicians and managers. Though there will always be a need for clerical help (indeed, this group will continue to comprise the majority of the department), there will be an increasing focus on bringing in more experienced personnel. This prediction is based on the technological trend that brings continued levels of automation to the accounting function, thereby reducing the need for clerks. Also, the same trend toward more technology means that a greater proportion of the accounting employees must have better training in how to use the new hardware and software. These trends will force the accounting department of the future to stock up on highly trained personnel with good management skills.

The accounting department is likely to become a more common route to top management positions. The accounting area has always been a fertile one for training people in the nuts and bolts of transactions, and how they must function. This is useful for a lower-level manager, but now that the department also handles a multitude of additional tasks, such as cost analysis, target costing, and advanced finance functions, it becomes a much better training area for higher-level managers. The company of the future will not only see large numbers of well-trained people advancing out of accounting, but they will also see a large proportion of new recruits clamoring to get into it, so that they, too, can receive the necessary training and experience.

This section discussed some evolutionary changes to expect in the role of the accounting function and the controller. It is likely that there will be a decrease in the proportion of purely clerical positions in the accounting area, in favor of more senior personnel with extra technical and management skills. Also, because of the greater breadth of responsibility to be obtained in this area, it will become more common for senior management personnel to come out of this area.

CHAPTER 2

Controller’s Responsibilities

A controller’s job can vary dramatically based on a company’s size and whether it has other managers in place who handle related functions. If a company is small and there are few other managers, the controller may end up with a formidable list of tasks on the job description. However, as a company grows in size, the role becomes more precisely and narrowly defined. This chapter covers the full range of the activities that may be assigned to a controller, beginning with the classical management areas of planning, controlling, reporting, and maintaining key accounting processes, and expanding into ancillary functions that may become part of the controller’s job, depending on the circumstances. In addition, the chapter touches on variations in the controller’s title, and why the term controller, though most commonly used, is perhaps not the best description for the job. The chapter concludes with a review of the relations between the controller and chief financial officer (CFO), the future job description of the controller, and how to manage in an explosive growth environment. This wide-ranging discussion gives the reader a comprehensive view of the controller’s job.

Variations on the Title

Numerous titles can be applied to the position of the chief accounting officer; however, the most common title used is controller. The duties are sometimes assumed by a chief accountant, office manager, comptroller, treasurer, assistant treasurer, or secretary. However, with the increased emphasis on accounting control and increased management duties, and for additional statistical and financial decision-making information, the duties of the position are more frequently being segregated into the role of a separate manager called the controller. This is especially true in larger organizations, where there is much more specialization. The term controller is an unfortunate one, for it seems to emphasize the control function only; as the reader will find after reading this chapter, there are a number of other basic functions this person performs, such as planning, reporting, and management, that are just as important as the control function. The chief accounting officer (CAO) title is a more complete description of the position; however, due to common usage, the term controller will have the same meaning as CAO in this book.

Planning Function

The establishment and maintenance of an integrated plan of operation is a major function of the controller. The business objective is profit, and planning is necessary to fulfill it, for profits do not just happen. Visualize, then, the role of the modern controller in business planning.

First, there is a responsibility to see that a plan exists and that it is supported by all levels of management. The implication of an integrated plan is that all parts will link together to support the business objective. For this reason, all members of management must participate willingly and contribute to the information in the plan. It must be the company’s plan and not the controller’s plan. The controller’s primary task is to act as the coordinator who assembles and maintains the plan, which results in a statement of forecasted income and expense, as well as a set of supporting schedules and assumptions. In more detail, the following points describe the controller’s key tasks related to the plan:

• Verify that the sales plan or forecast supports known corporate policies and objectives, such as geographic areas to enter and types of products to sell.

• Verify that the sales plan appears to have realistic assumptions, such as an expected sales amount per salesperson that is valid based on past history.

• Verify that the production plan supports the sales schedule. This involves comparing the amount projected to be sold to the amount to be produced, while factoring in the amount of finished goods inventory already on hand.

• Verify that the production plan is within facility capabilities. This involves comparing projected production volumes to the company’s history of production rates, also factoring in the addition of extra shifts.

• Verify that expense levels are in proportion to other activities. For example, the utilities expense must go up if the company is adding a facility, while the travel expense must increase if there will be a larger sales staff.

• Verify that there is sufficient funding for the projected activity. If there is not a sufficient amount of debt or equity funding, the plan must be recast on a smaller scale.

Once the plan has been completed, the controller should test or appraise its adequacy and report to the CFO or chief executive officer (CEO) on the results of this analysis. It must be judged based on the following concerns:

• In light of past experience, is it realistic?

• Does it reflect economic conditions that are expected to prevail in the period of the plan?

• Have the related expenses for product lines designated to be discontinued, such as production equipment or inventory disposal, been considered?

• Does it meet the company’s requirements for return on investment and such other ratios or tests as may be applicable?

Some of the testing and analysis will be accomplished as preliminary plans are formulated, and the rest will await the total picture. However and whenever it is done, the controller is the counselor and coordinator, extending advice and suggestions to all who need it during the plan preparation. Final responsibility for the plan rests with the CEO, and responsibility for each operating function must be that of the manager in charge of each function. Nonetheless, though responsibility for the plan lies elsewhere, the controller should be deeply immersed in the underlying mechanics and assumptions of the plan; the company relies on the controller to perform this function.

Control Function

The management function of control is the measurement and correction of performance so that business objectives and plans are accomplished. Management control seeks to compel performance to a plan or standard. The controller assists in this function by providing information to the managers of each function, so that they can enforce control-related issues. The controller cannot enforce control issues in other departments, since there is no managerial oversight of those areas, but the controller does correct control-related problems within the accounting function.

Activities in the control function absorb a large portion of the accounting staff’s time. Some control information is provided to management by the accounting staff every day; other data are prepared less frequently, as circumstances require. For example, larger companies that are labor intensive may find that hourly or daily information on labor performance may be helpful, or weekly manufacturing expense figures may be needed.

However, the controller’s involvement does not end with the mere feedback of reporting information to various parts of a company. Instead, the controller must devote a great deal of time to flowcharting existing systems, examining the results for control issues, and implementing process changes that will eliminate the control problems. Only after all this activity will a controller be able to issue reports on the results of controls.

A controller must become heavily involved in all stages of the control function, which extends from system analysis through problem identification and change implementation, ending in control reports that note the results of the control alterations. This is one of the most crucial tasks for the controller.

Reporting Function

Insofar as it concerns internal management, the reporting function is closely related to both the planning and control functions. Reporting is essential to make planning and control effective. Yet the reporting function is not merely one of presentation of tabulations and is not wholly routine, although some phases can be automated. Moreover, the management that makes decisions often cannot be kept adequately informed solely from periodic statements regardless of how well designed they may be. The reporting function encompasses the interpretation of the figures, and the controller’s duty is not discharged until management actually understands what is being presented.

Ensuring that management understands what it reads calls for an entirely separate set of skills than those given a controller in business school. This requires constant informal meetings with all recipients of accounting reports, not only to go over excessively large variances, but also simply to ensure that they understand what they are reading. A good supplemental method is to construct a formal training program that describes the nature and significance of the information being issued, and to constantly update and again present this training to management.

In addition, the controller may be required to report to outside entities, which usually calls for some reformatting of the internal reports. Typical recipients of reports are shareholders, creditors, the general public, customers, the Securities and Exchange Commission (SEC), and the Internal Revenue Service (IRS).

The controller is not only responsible for assembling data on a large number of topics into easily readable reports for consumption both inside and outside the company, but also for ensuring that the recipients understand what they are given.

Accounting Function

The systematic recording of financial transactions is often regarded as the principal function of the controller. The controller is expected to apply sound accounting principles and practices within the company, as well as to stay current on the latest technological advances, so that this can be done in the most effective and efficient manner possible. The last few decades have revealed further advances in management theory that a controller is now expected to implement in the accounting function, including:

• Benchmarking key practices. A controller should regularly compare the performance of the accounting department for various tasks against the results of other accounting functions at other companies, not necessarily in the same industry, to see if anyone else is doing it better, and, if so, to copy their practices into the accounting department.

• Converting to electronic transactions. Many of the larger companies now send transactions to each other with electronic data interchange, rather than with paper-based transactions. This is a boon to the accounting department, because the transactions can be automatically entered into the accounting computer system (since it is already in electronic format) without any error-prone manual rekeying of information.

• Reducing cycle time. The controller should actively engage in cycle time reduction, so that the time required to complete the primary transactions is greatly reduced. This allows a company to act more quickly, as well as to generate information about the results of its actions, both of which allow it to compete at a higher level.

• Outsourcing accounting functions. The controller should look into handing some or all accounting functions over to suppliers that are better equipped to handle key transactions. For example, many companies now outsource their payroll processing to suppliers that calculate taxes, make tax deposits, and pay employees by direct deposit. The controller should review this option for other accounting functions, too.

• Reengineering key functions. Some accounting functions may require so much effort to complete that it is best to scrap the system and start with a new approach that vastly reduces the effort, error rate, and cost of the old function.

All of these new methodologies ensure that today’s controller will be armed with enough tools to greatly improve the operational effectiveness of the accounting function.

Additional Controller Functions in Smaller Companies

The controller of a smaller company will find that the position includes a number of additional tasks besides those already enumerated in the previous section. This is because a small company cannot afford to also hire a CFO, an office manager, a computer services manager, and a human resources director. Consequently, all of these functions may fall on the controller. When applying for a controller position with a small company, it is useful to see if these other positions are filled—if not, the controller will have a much wider range of job activities. The main activities in each of those areas will probably fall under the controller’s managerial umbrella.

The most common additional functions that a controller will take on are those in the finance area. These tasks are normally handled by the CFO, which is a position that many small companies dispense with if they have minimal funding needs or are not publicly held. The primary tasks of the finance function are:

• Acquiring insurance coverage

• Conducting public offerings

• Dealing with investors

• Dealing with lenders

• Determining customer credit levels

• Investing pension funds

• Investing surplus funds

Of the tasks normally handled by a CFO, the controller usually has little trouble in managing insurance, credit, and investment decisions. However, conducting a public offering is usually well outside the experience of most controllers, and so it would behoove a controller to recognize this inadequacy and bring in qualified help if a company decides in favor of a public offering.

A small company, usually one with less than 100 employees, frequently does not have a human resources manager. This means that the function, once again, must be managed by the beleaguered controller. Many of these new functions are administrative and procedural in nature—tasks for which most controllers are amply qualified. However, others, such as career planning and recruiting, are not. These latter tasks are sometimes shifted elsewhere in the organization, depending on who is most qualified to handle them. The most typical human resources functions are:

• Administering changes to the pension plan

• Administering new-employee paperwork

• Conducting employee safety training

• Conducting recruiting for all positions

• Devising a career plan for key managers

• Maintaining employee files

• Processing medical claims

• Processing workers’ compensation claims

• Updating the employee manual

Given the large proportion of clerical tasks in the human resources function, which are similar to the clerical functions of the accounting area, most controllers are fairly comfortable in administering this department. Some tasks, such as safety training and administering the pension plan, require some extra knowledge to handle. The most uncommon tasks for a traditional controller are creating staffing plans and recruiting. These tasks are so different that the CEO sometimes hands them off to someone else in the organization.

The most common additional function for the controller to manage is administration. This includes the secretarial pool (if any), the reception function, all office equipment, and the telephone system. Because this area impacts all functions, it is common to have a disproportionate volume of complaints about it that take up an excessive amount of a controller’s time. Accordingly, it is frequently handed off to an assistant controller. In addition, it is wise to outsource the repair and maintenance of all office equipment and the telephone system to a qualified supplier. This reduces the controller’s day-to-day management to contacting suppliers and ensuring that the administrative staff is supplemented by a sufficient number of temporary help to complete short-term projects, such as special mailings, that pass through this area. The most common administrative functions are:

• Answering incoming calls

• Ensuring that all office equipment is operational

• Ensuring that the telephone system is operational

• Managing administrative staff

• Handling mail

• Working with temporary help agencies to bring in personnel for special projects

Finally, the controller sometimes manages the computer services function. Most small companies maintain only the minimum number of computer applications, and these are usually packaged software, which allows them to avoid having a full-time department to handle this function. Instead of a separate department, the controller is in charge of backing up the computer system, ensuring that it is repaired promptly, that the system is expanded as the situation requires, and that new software is implemented in an efficient manner. Due to the highly technical nature of this work, a controller is well advised to outsource as much of this work as possible rather than dealing with it internally; not only does this approach reduce the controller’s workload, but it also brings in much more qualified personnel than most small companies can afford to keep in-house. The main computer services functions are:

• Backing up the computer system

• Enforcing computer security standards

• Installing new hardware and software as needed

• Maintaining all hardware and software

• Maintaining and repairing the computer network

• Providing system training to employees

The controller should consider a disaster recovery plan that details how to make the system operational again as soon as possible in the event of a major problem. Though other parts of the computer services function can be outsourced, this one must be handled internally, and correctly—if the controller does not prevent a serious computer crash that renders key systems inoperable, this may have a major, and negative, impact on senior management’s view of how the controller is performing.

There are additional areas that the controller of a smaller company may find him-or herself supervising. The most likely areas are human resources, administration, computer services, and finance. The controller is well advised to outsource as much of this extra work as possible in order to put it in the hands of experts from suppliers, while also handing off selected tasks to other members of the organization who may be more qualified to perform them. The remaining tasks must be managed by the controller or a subordinate. Because these are areas in which most controllers are only partially trained, this can involve a very rapid and intensive learning experience.

Controller’s Job Description