Optimising financial processes

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Balance Sheet Hygiene – The New Audit Hurdle

Anyone would tell you maintaining good hygiene, no matter the place, always makes sense. Never has hygiene been a more current topic than it has been the last few months.

Good hygienic practices should be extended to your Balance Sheet. This is becoming the new frontier in audit commentary.

In these times where Cash is King, Profitability is Queen, and uncertainty abounds, there is a significant opportunity to “sanitize” your Balance Sheet to expose hidden value and latent risk, all the while improving your Balance Sheet hygiene.

Given the vast amount of transactional volume flowing through your Purchase Order and Accounts Payable ledgers it only takes a small percentage of errors to occur in order to build up a backlog of reconciling items.

If these items do not get reviewed, substantiated, and properly dispositioned they will continue to build and become a breeding ground for compliance issues, fraud opportunities, and potential restatements of financial results, resulting in a negative impact on stock valuation at a time of high volatility.

We don’t want any of those things.

Consider our recent challenges on increased audit focus on revenue recognition. Now revenue recognition reviews take place at least quarterly, and in some companies monthly, to ensure compliance with internal and external regulatory requirements.  I am sure these reviews are quite familiar to most of you.

When was the last time we spent similar effort reviewing our liabilities?  I am not talking about significant legal accruals or M&A accruals. These typically are top of mind and are monitored quite closely on a regular basis.

I am talking about the nitty gritty detail surrounding completeness of goods receipts. We have seen liabilities come under increasing scrutiny over the past 12-24 months and become more of a focus for internal and external auditors.

Recently, we shared experiences of a major company reconciling and recognizing millions in aged, un-matched, un-owed goods receipts that they could credit straight to their bottom-line as liability reversals. At a time where everyone is scrambling for financial performance, your profitability could be hiding in your balance sheet, squatting in a house it doesn’t belong!

Reviewing, reconciling, and dispositioning GR transactions is a key to maintaining proper balance sheet hygiene and to reducing the risk of a Significant Audit Deficiency.

Just think of all the purchase orders, goods receipts, goods returned, invoices, and payments that flow through your systems every day, week, month, quarter, and year.  It only takes a fraction of one percent of those transactions to be processed in an inconsistent manner to cause a build-up of over-accrued liabilities, unprocessed credit memos, and, worse, the potential for erroneous payments to your suppliers.

By implementing a process and cadence around reviewing, reconciling, and dispositioning these transactions you can ensure a healthy and hygienic set of Procure to Pay ledgers. If you want to know about a smart way of executing this, we might have some ideas for you…

Thanks for reading…