• The value of accounting in today’s business

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    CHRIS FERAREZA

    CHRIS FERAREZA

    Imagine a company started by a struggling entrepreneur: it began with one accounting staff, likely a non-CPA, and used Excel spreadsheet, largely a manual system. In the beginning, the attention of the business owner would primarily be focused on producing quality products or the efficient delivery of services, as well as developing and growing its client base. Over the years, the business has succeeded and expanded into an operation that now has more than 20 branches with a significantly much higher volume of transactions. However, its accounting group has likely remained lean, still employing a manual accounting system.

    This story is not uncommon. Most businesses see their front office, sales and operation units or the units generating revenues as priority areas for resources and funding. On the other hand, the back office, the accounting unit – the one that tracks information after the operations have generated revenues and incurred expenses, is considered a cost center and thus, receives the least allocation in funding.

    Because of this mindset, it is not surprising that business owners wake up one day finding their financial records in disarray and the financial reports either lacking or unreliable, or both. Common signs that indicate problems in the accounting group would include, among others, missing or unavailable financial reports or basic financial statements; months of backlog in transaction records; various unsupported transactions; unreconciled general ledger and subsidiary ledger; and a lack of or substantially delayed bank reconciliations.

    The lack of attention to the proper and timely accounting of business transactions has significant consequences. Management is not properly guided when making business decisions, resulting in foregone opportunities or bad decisions that could lead to losses. Reliance on cash flow reports or the movements of funds in the company’s bank accounts, which are used as an alternative basis for assessing the business’ position, poses dangers to decision-making. In this scenario, business owners usually fail to consider other critical aspects affecting the business such as contingent liabilities, unrecorded obligations. Likewise, fraudulent transactions within the organization may go undetected when accounting records are not in order.

    The lack of proper accounting records is also one of the reasons why companies are unable to comply with their tax obligations. The business is likely to be very vulnerable and unprepared for any examination by the tax authorities.

    As a Firm, we have always advocated maintenance of proper accounting records. We always believe that management will have a better picture of the company’s current financial status and will make better informed decisions of the future when the financial records are updated, prepared on time and in order.

    It is, thus, pleasing to see an increasing number of businesses that are realizing the value of maintaining proper accounting records. They engage accounting professionals to help them fix and keep their books in order. While updating financial records generally takes time and requires investment, companies now understand that not having accurate financial information is risky and may result in more costly business decisions in the long run.

    The participation of the younger generation in family-owned businesses has also paved the way for the founding members of family to consider infusing new technology and professional consultants into their operations. Increasingly, these new generations of business owners are able to convince their parents that the way of doing business has now evolved and, to be competitive, finance and accounting practices must not only efficiently record the results of operations and financial condition of the company but also provide critical information for a more accurate analysis of customer behaviors and needs.

    The transformation of these companies has several benefits – some companies are finding it easier to access financing and some are even able to launch an IPO. With better quality financial reports, decision-making by the management improves significantly.

    Clearly, the accounting unit of a business organization is no longer seen as a cost or just a back office but as a necessary support group enabling the operations to achieve its strategy. We have seen companies that took the hard route to keeping their records updated and reliable, and several companies that regressed or decided to continue doing things the old way as the cleaning-up process took its toll. Those that took the hard road found the path to success.

    Chris Ferareza is a Partner, Audit & Assurance and In-Charge of Training at P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firm in the Philippines, with 20 Partners and over 700 staff members.

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    2 Comments

    1. Yes keeping your accounting records easily at hand and complete is only part of a good management but enterprise wise its importance is relatively minimal in driving the conglomerate to the next level. You have your results on time, ehhhh about a minute late and X stock declared IPO, gold price increased, steel billets was discounted..and what my Income Statement was sent 5 days ahead and you call this achievement. My point is train bookkeepers to manage the books but use your CPAs to give you timely advise and not wallow in record keeping.

    2. Jose Samilin on

      While accounting is primarily important for all businesses to measure the results of operations and state the condition of the business at a given date, it doesn’t matter whether manual system or computerized system is employed for as long as accuracy and timely reporting of financial statements and other necessary schedules and disclosures of a financial character required by its management prepared in compliance with the application of generally accepted accounting principles and procedures were consistently applied during the period. Sometimes we learn in a hard way the essential value of adequate accounting system and internal control not until certain tax case, and other accounting related cases filed in court where accounting system and procedures were employed by the business will be subjected for its highest test in court litigation. One of the tax case in American Territory that adopts Federal tax laws caused the demised of what is called “bank deposit method” of income tax investigation in the entire United States when in a Jury trial lost its case in this Territory. Though in many years were used in the USA, bank deposit methods or what is equivalent to Net worth or Equity method of tax assessment/investigation in the Philippines by the BIR, was ultimately discontinued in all IRS agencies for purpose of income tax investigation in the United States and all its Territories. The bank deposit methods of accounting by used by US IRS presumes all deposits and credits to the bank accounts were revenues or income while all disbursements and debits to the bank accounts were cost and expenses. As a practicing accountant in this Territory and admitted by the High Court as expert witness, dared challenge with the lawyer the bank deposit method in court in a tax case brought in court where the government lost its case, both in criminal case and civil case that lasted in numerous trials for period of two years. You could just imagine the huge amount of US Dollars lost in terms of training and staffing and its implementation cost all through out the Continental United States, Alaska, Hawaii and all its Territories when it meted its historic demise in the High Court of the US Territory of American Samoa in the Pacific, sometime in 1986.