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Improving The Financial Statement Process

September 15, 2020

You’ve just finished compiling the annual financial statements, spending a few days correcting the same errors that you corrected last year and the year before that.  And although the number and variety of expense codes in the general ledger have proliferated, you spent another day analyzing the transactions coded as “other expense”, because the amount reported in the expense matrix was only slightly below the amount reported for compensation expense.  

Now you’re presented with performance goals for this year that include preparing quarterly interim financial statements.  You agree with objective, interim statements are important for providing decision-useful information, and ensuring that important processes and reconciliations are completed more than once each year.  However, with the amount of cleanup required for year end, how will you ever find the time to prepare financial statements three more times during the year?

With that very common scenario experienced by many controllers and AVP’s of finance, now is the time to act to address these issues and improve the process of preparing the institution’s financial statements, proceeding on the path to achieve this worthwhile and attainable goal.  

Accounting Errors

Many financial systems have features that support transaction validation rules, either to permit allowable combinations of the elements within the accounting transaction string, or to prevent invalid combinations.  Generally, there are fewer invalid combinations, making it easier to establish the rules to prevent certain errors.  

Some of the most common invalid transactions are:

  • transactions posted directly to net assets
  • expenses procured through purchase orders charged to salary object codes
  • expenses recorded to endowment and similar funds or loan funds
  • “other” revenue added to restricted funds

If your financial system does not support developing transaction validation/invalidation rules, you can still improve the financial statement processes and identify and correct these errors as they occur.  Make it a practice to run diagnostic reports from your financial system to identify the anomalies and address them on a regular basis, to both correct the offending transaction(s) and identify and address the root causes.  Creating a checklist of reports/queries and running them every month prior to the month-end close will eliminate them over time and streamline preparation of the interim and annual financial statements.

Proliferation of Expense Categories

Most financial systems have chart of accounts maintenance tools that permit creating new expense categories, aka “object codes” by central accounting staff.  In organizations where the maintenance process is not tightly controlled, the number of categories can expand exponentially.  Even when the process is tightly controlled, service-oriented chart of accounts managers may accommodate requests for new codes without verifying that a similar code already exists.  Drop-down lists become unwieldy, and few people will take the time to understand the difference between options, (e.g. lab supplies versus instruction supplies).  The surplus of options and distinctions without a difference make “other expense” or “miscellaneous expense” the default choice.

Some financial systems have features that require evaluating object codes each year, prompting chart managers to choose the valid codes to carry forward forward to the new year and deactivating those that are obsolete or duplicative.  Even without the system prompt, the following actions can be taken to manage the choices and achieve the optimal balance between too many and not enough.

  • Run diagnostic reports to identify codes that have no transactions for the prior year, and deactivate those that are no longer needed.
  • Review the labels to identify codes that are very similar and follow up on usage to learn why one choice may be selected over a different choice.
  • Look for usage patterns by department, are certain departments assigning different meanings to the codes to track expenditures internally?
  • Identify common patterns in the expenses coded as “other” expense – were there categories in sufficient volume to warrant creation of new codes?

Using the information gleaned from these activities – deactivating unused codes, clarifying definitions of existing codes, and frugally adding new codes – can help maintain the list at just the right level of detail.

Kuali Financials Features

Kuali Financials delivers a robust structure of financial processing parameters, maintainable by central financial office users, to establish transaction rules for both valid and invalid combinations.  The maintenance screens are intuitive and easy to navigate and there are numerous parameter options utilizing all of the chart of accounts’ elements and attributes.  Additionally, Kuali Financials encourages cleanup of the financial system object codes by requiring an active review and renewal of the codes for the following year.  The discipline inspired by the annual process contributes to achieving a manageable list with minimal effort.

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