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Accounting and Finance
Policies & Procedures
Discussion Document
ACCOUNTING POLICIES
Table of Contents Why Policies and Procedures are Important Policy vs. Procedure Policy and Procedure Overview What makes a good accounting Policy and Procedure? What are the characteristics of a good “Accounting Policy and Procedure Set”? Suggested format and typical policy list Approach
WHY POLICIES AND PROCEDURES ARE IMPORTANT
The rules by which companies must conduct business have changed and are subject to new rules and requirements. With numerous companies changing their processes to meet demands, supportive Policies & Procedures are paramount to success.
For companies to operate and be in compliance with the new, changing and evolving rules, companies need to have an up to date suite of policies and associated procedures.
An up to date and complete suite of polices ensure that
A proper control framework is established Operating managers understand the “rules of the road”
WHY POLICIES AND PROCEDURES ARE IMPORTANT, CONTINUED
Companies have always had polices and procedures, but one of the learning's from SOX documentation process is policies;
do not reflect the latest rulings and required accounting treatments – even though the company may be following the rules ( amortization of goodwill, accounting for derivatives, etc)
policies on standard topics such a signatory authorization do not reflect the current organizational structure
general policies on Accounts Payable, Accounts receivable and other such accounting areas do not reflect the latest system sources (new ERP or consolidation system)
WHY POLICIES AND PROCEDURES ARE IMPORTANT, CONTINUED
With an renewed focus on controls, finance and operational professionals look to the Corporate polices to provide guidance in their decision making and without a firm stake in the ground, individuals are left to make decisions using their own judgment and understanding of the topic
Polices and procedures must also be readily accessible, consequently the thick binder of policies sitting on a shelf is not going to foster an environment where the polices are going to be adhered to and makes the enforcement considerably more difficult.
ACCOUNTING POLICIES VS. PROCEDURES
What is the difference between a Policy and Procedure? Policy : Long-lived – should seldom change
Not open to interpretation
Sets the standard for how business is to be conducted
Not constrained or dictated by the current business environment
Has global/enterprise application
In rare cases, a policy and procedures may be combined to ensure consistent application
across the enterprise – such as for inter-company accounting
ACCOUNTING POLICIES VS. PROCEDURES, CONTINUED
What is the difference between a Policy and Procedure? Procedure: Usually left up to local management
Provides the Who, What, Where, When and How
Enables continuous improvement by providing a tactical roadmap which can be improved upon as time passes May be system/application dependent, by including specific references
POLICIES & PROCEDURES: OVERVIEW
What are “Policies & Procedures” (P&P)? P&P are the “standards” that enterprise management has established, set down in writing, and made widely available to all those with the need to know.
Clear P&P’s reduce time wasted questioning another’s judgment;
Rules for key transactions are stated “in black and white”;
The existence of P&P can provide evidence to audit committees and others of
an “organization in control”.
POLICIES & PROCEDURES: OVERVIEW, CONTINUED
What do Policies & Procedures do for an Enterprise? Control: P&P can help management insure transactions are executed in
accordance with their general or specific instructions; Productivity: With P&P, people will not have to “reinvent the wheel” to find the
proper treatment each time a similar issue arises; Leverage Expertise: Policy and Procedures development can leverage the expertise of
the company’s best people on a subject anywhere in the world; Communication: P&P enable people to easily locate the answer in a hurry; Consistency/Standardization:
With P&P, the same transaction will be treated the same way across the enterprise; further, standardized practices set the stage for achieving savings from shared service centers, and enable companies to get the most out of their systems and technology;
Official and Ling-lived:
P&P carry more weight than a memo – especially if the memo writer is no longer around;
Education: The P&P web site can be a place where new people learn the key company standards.
POLICIES & PROCEDURES: MISCONCEPTIONS
Misconceptions about Policies & Procedures:
P&P create bureaucracy, slow the business down, stifle entrepreneurial spirit:
•Properly designed P&Ps enable managers to channel their entrepreneurial efforts to areas where there is the potential to find a competitive edge, and not waste their efforts in areas where there is little opportunity. These latter functions should instead be done in the standardized, efficient manner company-wide.
P&P do not fit a decentralized management structure:
•The advantage of a decentralized management structure is to provide the local manager with the flexibility to make decisions in the key areas of success for their particular business. This does not include the ability to waste valuable resources in areas where company-wide standards will yield the most cost-effective solution.
POLICIES & PROCEDURES: MISCONCEPTIONS, CONTINUED
Misconceptions about Policies & Procedures:
Senior/executive management can’t dictate Policy and Procedures – they don’t understand the “front-line issues”:
•Corporate-wide policies should be created as a team effort with those “front-line” people having the opportunity to provide input and review for practicality prior to official issue.
POLICIES & PROCEDURES: COMMON PROBLEMS
Some Common Problems Companies have in the Policies and Procedures area: P&Ps are not kept up to date P&Ps are not readily accessible P&Ps are written for the accounting and finance professional and are not
easily understood by non-financial professional P&Ps do not reflect a global business and do not reflect, address or may
allowance for local customs Reliance on memos – which are lost, disregarded after a while, may not be
clear or well thought out before being distributed, author has left the position or the company
Too many duplicative Policy and Procedures sets – one for each division, one at corporate, one for each geography, etc.
Policies are not cross referenced to provide a more detailed understanding of the topic – e.g. a policy on capital appropriation should reference the policy on signature authorization
Mergers & acquisitions – failure to integrate P&P
WHAT MAKES GOOD ACCOUNTING POLICY?
Concise Written in simple language and not filled with acronyms and technical terms Specifies management and fiscal accounting requirements and responsibilities
(where appropriate) Specifies the accounting treatment in general terms As necessary, delineates periodic and annual activities May include a summary or highlights section for longer more detailed policies Provide guidance on conceptual and theoretical matters to facilitate practical
application (e.g. Company Policy is that fixed asset have zero salvage value) Make it “easy” to enforce – do not create situations where one is called upon to
question management judgment Logical groupings of policies, either by topic (sales accrual) or by the
components of the business cycle (revenue, expenditure, intercompany, etc.)
WHAT MAKES GOOD ACCOUNTING PROCEDURE?
Specific with references to systems, organizations, positions, timetables and approvals
Written in simple language and not filled with acronyms and technical terms Written locally by the individuals responsible for the activity and reviewed and
approved by local management Specifies management and fiscal accounting responsibilities in detail Illustrates the proper accounting treatment and may include examples of
journal entries or “T Accounts” Details day and time of requirements when necessary Provide technical reference on topics and reference the applicable policy (s) Make it “easy” to enforce – do not create situations where one is called upon to
question operational managements judgment Logical groupings of policies, either by topic (sales accrual) or by the
components of the business cycle (revenue, expenditure, intercompany, etc.) Does not include specific names or other references that may change very
frequently
Suggested Format
ACCOUNTING POLICIES AND PROCEDURES
Title and Number Date Issued, Date Revised Objective Scope Policy and/or Procedures Summary Policy and/or Procedures Detail Exceptions (may be needed for only a few policies and where the policy may conflict with local statutory regulations) Responsibilities Definitions (applicable to the Policy and Procedures) References Appendices
CHARACTERISTICS OF GOOD ACCOUNTING P&P’S
Policy and Procedures Set is complete – a Policy and detailed Procedure exists for each key area
Polices are up to date and reviewed on a regular schedule • Business or Accounting Changes are routinely incorporated • If a Policy and Procedures is planned, provide a date when it will be available
Readily accessible (e.g. Website)
What are characteristics of good “Accounting Policy and Procedures Management”?:
CHARACTERISTICS OF GOOD ACCOUNTING P&P’S, CONTINUED
There is a formal process for Policy and Procedure development/update that allows the entire company to be involved. • Focal point for requests for the development of a Policy or Procedure on a specific topic
• Predefined process for drafting, reviewing and approving policies
• Prioritization process (e.g.) • First priority may be assigned to policies which must be executed at
subsidiaries and remote locations (e.g. revenue recognition) • Second priority may be those topics/subjects that are performed at
corporate under direct control (e.g. accounting for stock options)
ACCOUNTING POLICIES, CONTINUED
Policies should be clearly identified as such Policies should be Separate from other general financial information and clearly identified Policies should not be commingled with other materials or incorporated into general communication.
such as: • System descriptions and procedures • Organization charts or announcements • News articles • Closing schedules • Internal control standards • Others
These things tend to be updated frequently, where policies are more long-lived.
CORPORATE FINANCIAL POLICY AND PROCEDURE DEVELOPMENT
There are 4 major phases that need to be taken into consideration for P&P development. At a high level they are:
Phase 1 – Needs assessment,
end-state design, planning
Phase 2 – Policy and Procedures
draft development
cycle
Phase 3 – Policy and Procedures
review and approval cycle
Phase 4 – Implementation
& Roll-Out
