This post concerns Internal Controls. A crucial task for the CFO is to produce accurate and timely financial statements. To accomplish this effectively and efficiently, a robust internal control system must be in place. Such controls apply to various line items on the financial statements as well as general controls that introduce some organizational structure of financial reports. The ensuing paragraphs address the latter
The first group of general controls involves executive oversight. The first step to establishing oversight is to devise a checklist of closing activities that is monitored by the CFO. Moreover, one person should be given responsibility for executing the closing process and assigning specific duties. In addition, every complex journal entry should be documented and reviewed by a second person. Third, the CFO should take or delegate responsibility for the entire closing process. That person should then assign responsibility for individual activities to the closing team. Finally, the CFO should review the journal entry log to ascertain the nature of all entries that are recorded. Once confident they are correct, the CFO approves them.
The next group of general controls involves specific activities to be undertaken so the production of the financial statements has effective controls. There should be mandatory reconciliation of all general ledger items larger than a predetermined amount. These reconciliations need not be performed if there is no activity in a given account. However, any cash or other bank account must be reconciled. Also, the books should be reviewed to make sure that prior period entries that were meant to be reversed were indeed reversed. Moreover, suspense accounts (those accounts where final disposition of the underlying documentation and terms remain to be resolved) should be reviewed to determine if any of the entries can be resolved prior to closing.
The final group of general controls pertains to robust documentation practices. Any information that is utilized to construct a journal entry should be captured in an electronic spreadsheet. The spreadsheet should be locked down to prevent the information from being cleared out. This will enable a historical justification of the journal entries. In addition, all journal entries, reconciliations, and supporting reports should be placed in a binder so that researching financial statement issues can be facilitated.
A crucial task for the CFO is to produce accurate and timely financial statements. To accomplish this effectively and efficiently, a robust internal control system must be in place. Such controls include general controls that introduce some organizational structure of financial reports.
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