• The language of business

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    CATHERINE H. SANTOS

    CATHERINE H. SANTOS

    In celebration of National Accountancy Week, this article focuses on accounting.

    Accounting became an organized profession only by the 19th century. However, its history dates back to ancient times. Some of the fundamentals of accounting have remained the same from the time Luca Pacioli, known as the Father of Accounting and Bookkeeping, published his work on the double-entry system of bookkeeping (debits and credits; but there have been various developments in accounting which resulted from, and in, important changes in history.

    Needless to say, accounting has played a crucial role in business over the years. As much as it is interesting to discuss the significant roles accounting played that altered the course of how we do business, allow me to focus on the lighter side of accounting and accountants. By doing so, I hope to dispel some of the common misconceptions or further validate positive stereotypes about accountants and also help non-accountants better appreciate accounting.

    What is the definition of an accountant? Someone who solves a problem you did not know you had; in a way you don’t understand.

    It has been said that jests are half-truths and such saying may be apt in this case. Working on numbers that tell the story of a business whether at a point in time or over a period of time, accountants are among those in the position to identify, predict and solve financial problems and also operational and other issues that currently or in the future may affect the organization. This does not mean, however, that only accountants can make sense of financial reports. Most people cringe at the thought of having to read financial statements since the common perception is that accounting or financial reporting is complicated. While that may be true, it actually aims to facilitate a standard way of reporting transactions thereby simplifying reporting of an entity’s financial position, results of operations and other financial information across business of various sizes, industries and geographical locations. Accounting IS the language of business after all.

    Let us try analyzing, for example, the relationship between revenue and gross profit. By dividing gross profit by revenues, one could easily see the proportion of profit generated by the sale, or the gross profit ratio, and assess the ability of a business to produce a good or render services. Regular analysis of the gross profit ratio, allows a company to revisit and further assess the effectiveness of strategies related to sales and production and to timely take necessary and appropriate actions.

    The ratio becomes even more meaningful when it is compared against forecasts and prior period results or even against ratios of other companies within the same industry. As we can see from the analysis below, Company B, without considering its gross profit ratio, may relax and feel good about having higher revenues than Company A. However, comparing its gross profit ratio with Company A may prompt Company B to determine why it is only getting half the profit from sales that Company A is getting.

    Why are accountants always so calm, composed and methodical? They have strong internal controls.revenue20160722Accountants are generally perceived to be cautious. Whether or not such perception is true is subject for debate. Instead, I would like to briefly discuss how internal controls can make not only the accountants within the organization calm, composed and methodical but also make other stakeholders sleep sound at night.

    Internal control is commonly defined as the process designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance. It is a means to achieving effectiveness and efficiency of operations; reliability, timeliness and transparency of financial and non-financial reporting; and adherence to laws and regulations to which an organization is subject.

    Contrary to what most people think, ensuring the effective implementation of internal control and the achievement of its objective is the responsibility of the entire organization and not only by those involved in accounting or audit. It does not cover only the controls related to the processing of financial transactions but it also encompasses control across the various business units and business processes. It covers entity level controls such as the company’s code of conduct, whistleblowing programs and internal audit as well as transaction level controls such as the approval of purchases and matching of invoices with delivery receipts.

    More than anyone else in the organization, accountants are perhaps associated with the effective design and implementation of internal control because their responsibilities often include processes and controls within the five components of internal control namely: control environment, risk assessment, information and communication, monitoring activities and control activities. It is therefore critical for management to clearly define and establish the role of the various accounting functions within an organization in the design and implementation of an effective internal control system.

    Welcome to the accounting department, where everybody counts.

    I have already lost count of the times people tell me that I must be good with numbers upon learning that I am a Certified Public Accountant (CPA). While this perception of accountants may be generally true, one has to remember though that accounting is not just about numbers and calculations. Accounting also involves making estimates and judgment and that such process is likewise governed by accounting standards and in some cases, even laws and regulations.

    In the recognition of receivables, for example, accounting standards require that the company initially recognize receivable at fair value and subsequently measure it at amortized cost, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the company will not be able to collect all amounts due according to the original terms of the receivables. The accounting department, often in coordination with the sales and collection departments, must therefore assess and determine the reasonable amount of impairment to be recognized and ensure that the company has established sufficient objective evidence for such impairment that will pass the requirements of stakeholders, accounting standards and regulators alike.

    It’s accrual world—the future of accounting
    PwC’s network leaders noted five megatrends that they believe have major impact to business around the world: demographic and social change, shift in global economy power, rapid urbanization, climate change and resource scarcity, and technological breakthroughs. These developments are shaping and disrupting global economic landscape and society. As with the double-entry system, I am confident that despite the daunting challenges brought about by these megatrends, accountants can take the good with the bad and continue to develop and better the profession as we also seize new and exciting opportunities for accounting and the accountants alike.

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    Catherine H. Santos is a Partner from Assurance and the Assurance Transformation Leader of Isla Lipana & Co./PwC Philippines. Email your comments and questions to markets@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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