VideoAlthough the CFOs we spoke with consider such adjustments to be "business as usual," all agree that when the number of adjustments creeps up month after month, something's amiss. Perhaps it's simply a warning of sloppy quality control on the assembly line, but faulty control procedures in the finance department are more common and more directly controllable.
There's no rule of thumb for DSO, mainly because industries vary greatly in the speed with which they collect. Tracking your receivables aging pattern is one useful yardstick; even better would be to compare your company's DSO with that of its peers. (To keep tabs on DSO and many other metrics, most publicly traded U.S. companies can compare themselves with their peers by entering company tickers in the CFO PeerMetrix interactive scorecards.)
4. Multiple Payments
Are your vendors seeing double? When they bill you once and you pay them twice, you may ensure that your company's credit is stellar, but it's not great for cash flow. Kris Onken remembers when, as a newly hired controller for a previous employer, three different vendors notified her of double payments. "I can only imagine how many more were out there that never reported it," she laments.
Your accounts-payable system is probably not to blame. Most standard accounts-payable software incorporates a safeguard that matches up each check with an invoice. Even off-the-shelf small-business software that retails for under $100 usually has that invoice-matching feature.
"Double payments, or slow payments, often have their origins in operations," observes Dave Peralta, and to some degree the finance department must rely on the diligence and discipline of the operating units. Bill Hurley, practice director at Parson Consulting, notes that new, sophisticated procurement systems have added another layer of complexity to the payment process. True, these trading systems may standardize the information gathered from vendors — but if an accounts payable employee runs into a snag while negotiating four or five software filters, an exception can take weeks to resolve.
Whether double-payment problems begin with poor compliance by operating units or with haywire procurement systems, the buck stops with the finance department. (That's a big reason so many companies are "Working on the Chain.")
5. Earnings Restatements
According to the U.S. General Accounting Office, during the past five years 10 percent of all publicly traded companies restated their earnings because of accounting irregularities. About 250 companies, the GAO estimates, will restate by the end of this year, far more than the 92 companies that restated in 1997.
Most restatements aren't a harbinger of fraud, simply the result of common accounting errors or oversight. Parson's Weinfurter maintains, in fact, that two-thirds of all restatements are caused by trip-ups related to revenue recognition. A restatement usually won't bring a company to its knees, adds Logitech's Onken, but "it's still a black eye." (Or is it a knockout punch? In a poll conducted for our special report "CFOs: The New Patsies?," more than 60 percent of respondents thought that an earnings restatement was the biggest threat to a CFO's career.)
Many errors that might lead to a restatement are caught by internal audits and corrected. When they slip by, says Professor Owers, it's a strong signal that the accounting and financial functions are having a problem with accounting judgments.
6. Manual Entries
The sole proprietor of John's Coffee Shop can automate his books for $80 with an off-the-shelf software package. Not only will he free himself from manual entries, his accountant tells him that he'll be able to shore up his financial controls.
For larger companies, however, ridding the finance department of manual entries and stand-alone spreadsheets is proving to be a Herculean task (think "Augean stables").
Parson's Hurley says that 99 percent of his clients — these are Fortune 500 firms, mind you — still work with spreadsheets or disparate financial systems. Only the Fortune 50, claims Hurley, are really breaking away from their reliance on spreadsheets, since only these companies have the resources to connect far-flung systems with middleware and to wean employees from spreadsheets by retraining them.
Spreadsheets are still handy for running "what if" scenarios as well as budgeting and forecasting exercises. But when the subject is financial controls, notes Crossroads' Stover, relying on stand-alone spreadsheets instead of financial systems "violates the audit trail." More opportunities exist for mistakes — or wrongdoing — and widespread use of spreadsheets means that a company's financial-database history is useless.
Balance sheets and income statements, Stover maintains, should be posted within a systems environment. (For more, see "Core Values," our ERP buyer's guide.)
7. Lack of Transparency
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