The way you prepare your books matters

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MHYCKE GALLEGO

MHYCKE GALLEGO

Recent entrepreneurial creativity has given rise to a number of haute cuisine or boutique food and dining restaurants. Some are mom-and-pop type specialty restaurants, which cater to a specific base of dining patrons. Of course, we also have the established restaurants that continue to satisfy our regular gastronomic needs, as well as cravings.

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We choose from a menu of carefully selected items, enjoy the sumptuous meals and go into conversations on how these creations were cooked and prepared. Then we ask for the inspiration behind the stores: the well thought-out ambience, the choice of organically grown ingredients, hygienic up-to-standard cooking process, or a customer-caring wait staff, among others.

The more we understand these restaurants and how they work and the values they abide by, the more we gain confidence in eating the meals they prepare.

In the same way, investors and stakeholders can have much more confidence in the financial statements they are “served” if corporate management can ably demonstrate that it has adequate control processes set in place over bookkeeping and financial reporting, i.e. how the books are prepared.

Nowadays, management itself (especially of those companies that are publicly listed) can manifest that it has designed and implemented internal controls related to financial reporting in several ways. Whenever the chairman, CEO, or the president and the chief financial officer sign the Statement of Management Responsibility accompanying a financial statement, they not only take responsibility for the financial statements but also provide assurances that adequate and effective controls were all in place. The Annual Corporate Governance Report (ACGR) issued by the Security and Exchange Commission (SEC) requires disclosure related to the internal control system of the company. Also, the Code of Corporate Governance specifies that companies establish, evaluate and monitor financial reporting controls to ensure the integrity of financial reports.

How does one strengthen the financial reporting and internal control process within one’s organization? We usually advise companies to:

1. Make sure they have the right talent. Investing in people with the appropriate knowledge, skills and attitude is key to ensuring that the accounting and financial reporting processes are managed effectively. Are hiring and screening processes primed to ensure that the right people are hired? Do they have adequate knowledge of the company’s business? Do the employees have the tools necessary to perform their roles or do they need to undergo continuing development? Are they consulted by the frontline personnel to promote seamless end-to-end accounting and financial processes?

2. Establish a robust close, consolidate and report process. Are controls over routine transactions embedded in your accounting system (for example, transactions do not proceed to the next phase when they exceed credit limits until a review is made)? Are rules over safeguarding of company assets–either physical, information or people assets–adhered to and enforced, or are there processes to capture the possibility of misappropriation of these assets? Are transactions properly documented for the preparation of accurate financial statements and related disclosures? Are controls over the financial statement close process in place? How long does it take the company to close its books? Are there appropriate approval processes in place?

3. Evaluate the gap in judgments used. The process of preparing financial statements requires that we adopt controls to ensure that they are free from material misstatements – whether due to fraud or error, controls on the application and use of estimates and judgments – and that they are employed in selecting accounting policies. As more judgment is exercised toward the preparation of financial statements and related disclosures, are there controls in place over non–routine estimation processes? Is an appropriate fraud risk assessment process in place?

4. Take a final look at the so-called forest instead of the trees. Once the financial reports are prepared, is there an overall sense check? Are reconciliations over key accounts performed? Are there adequate disclosures supporting the financial information? Are they reviewed as to whether they reflect the general strategies, action plans and policies adopted by the Board and the management?

More and more, management is being tasked to ensure that adequate controls are in place in the preparation and reporting of financial statements. It is also being required to categorically state so by the regulatory agencies. Demonstrating they are working on a continuing basis and communicating these periodically to those charged with governance, as well as the stakeholders, increases confidence and reliance on the financial statements.

While there is a euphemism about “cooking the books” (i.e. that of presenting incorrect or overstated financial results), the analogy between the food cooking process and the process of preparing financial reports is apt. Behind every meal served to us, various controls were introduced in the way they were cooked and prepared. When we know how ingredients were selected, how judgment was used in seasoning and cooking, and how care was taken in preparing the meal, we derive more satisfaction in this as we partake of them with friends. Behind every financial report generated, the controls we have put in place increase the confidence and reliance on the numbers presented. Indeed, the way you prepare your books matter.

Mhycke Gallego is a partner, Advisory Services, and Head of Knowledge Management of 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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