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Chapter 1 Controllers Job

MAIN JOB FUNCTIONS

The controller has a number of distinct job functions. The first four are ones that can be ascribed to any manager in any department.
The last two are more specialized and do not refer to management skill. The six functions are:

1. Planning. The controller is responsible for determining who does the work, what work is to be done, and the timing of
work completion in the accounting department, especially in regard to the timely processing of transactions and the
issuance of accurate financial statements. This also extends to the budget, where the controller guides the budgeting
process through other departments.
2. Organizing. The controller is responsible for obtaining and keeping the services of experienced and well-trained
accounting personnel; this is by far the most important organizational task. This also involves obtaining sufficient floor
space, office equipment, and computer hardware and software to complete all assigned work.
3. Directing. The controller is responsible for ensuring that all employees in the department work together in an orderly manner
to achieve the controller’s plans.
4. Measuring. The controller is responsible for measuring the performance of all key aspects of the department to ensure
that performance matches or exceeds standards and that errors are caught and corrected.
5. Financial analysis. The controller is responsible for the review, interpreta- tion, and generation of recommendations
related to corporate financial performance. This requires excellent communication skills (both written and oral), so that
the controller’s information is properly and effectively conveyed to the other members of the management team.
6. Process analysis. The controller is responsible for periodically reviewing and evaluating the performance of each major
process that is involved in the completion of transactions, with the dual (and sometimes conflicting) objectives of
maintaining tight financial controls over processes while also running them in a cost-effective and efficient manner.

JOB DESCRIPTION

The controller has one of the most complex job descriptions of all company managers because there are so many functional
areas for which he or she is responsible. This section provides a detailed job description that is sorted by general category in
alphabetical order. The controller’s responsi- bilities are:

Auditing
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The scheduling and management of periodic internal audits, as well as the preparation of resulting audit reports and
the communication of findings and recommendations to management and the board of directors.
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The preparation of work papers for the external auditors and the rendering of any additional assistance needed by them
to complete the annual audit.

Budgeting
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The coordination of the annual budgeting process, including maintenance of the company budget, and the transfer of
final budget information into the financial statements.

Control Systems
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The establishment of a sufficiently broad set of controls to give manage- ment assurance that transactions are processed
properly.

Cost Accounting
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The coordination of periodic physical inventory counts.
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The periodic analysis and allocation of costs based on activity-based costing pools and allocation methods.
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The continual cost review of products currently under development, using the principles of target costing.
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The periodic compilation and evaluation of inventory costs.

Financial Analysis
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The periodic comparison of actual to budgeted results and the communi- cation of variances to management, along with
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recommendations for improvement.
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The continuing review of revenue and expense trends and the communi- cation of adverse trend results to management,
along with recommenda- tions for improvement.
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The periodic calculation of a standard set of ratios for corporate financial performance and the formulation of
management recommendations based on the results.

Financial Statements
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The preparation of all periodic financial statements, as well as their accompanying footnotes.
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The preparation of an interpretive analysis of the financial statements.
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The preparation and distribution of recurring and one-time management reports.

Fixed Assets
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The annual audit of fixed assets to ensure that all recorded assets are present.
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The periodic recording of fixed assets in the financial records and their proper recording under the correct asset
categories and depreciation methods.
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The periodic review of fixed assets to determine the existence of any impairment.
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The proper analysis of all capital expenditure requests.

Policies and Procedures

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The creation and maintenance of all policies and procedures related to the control of company assets and the proper
completion of financial transactions.
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The training of department personnel in the use of accounting policies and procedures.
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The modification of existing policies and procedures to match the require- ments of government regulations.

Process Analysis
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The periodic review of all processes involving financial analysis to see if they can be completed with better controls,
lower costs, or greater speed.

Record Keeping
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The proper indexing, storage, and retrieval of all accounting documents.
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The orderly planning for and scheduling of document destruction, in accordance with the corporate document retention
policy.

Tax Preparation
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The timely preparation and filing of tax returns, as well as the supervision of all matters relating to corporate taxation, such as
conducting an effective tax management program, and both providing and enforcing policies and procedures related to the
compliance of all corporate person- nel with applicable government tax laws.

Transaction Processing
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The timely completion of all accounting transactions at the intervals and in the manner specified in the accounting
policies and procedures manual.
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The proper completion of all transactions authorized by the board of directors or in accordance with the terms of all
authorized contracts.
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The proper approval of those transactions requiring them, in accordance with company policy.

The key job qualifications are:

Analysis of information. The controller must be sufficiently comfortable with financial information to readily understand the meaning of a
variety of ratios and trends and what they portend for a company
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Communication ability. A key component of the controller’s function is compiling information and communicating it to
management. If the compiling part of the job goes well, but management does not understand its implications, then the
controller must improve his or her communica- tion skills in order to better impart financial information to the manage- ment
team.

Company and industry knowledge. No accounting system is completely ‘‘plain vanilla,’’ because the companies and industries in
which it operates have a sufficient number of quirks to require some variation from the typical accounting system. Accordingly, the
controller must have a good knowledge of both company and industry operations to know how they impact the operations of the
accounting department.

Management skill. The controller presumably will have a staff and, if so, will have considerable control over the productivity of
that group. Accordingly, the controller must have an excellent knowledge of the planning, organizational, directing, and
measurement functions needed to manage the accounting department.

Provision of timely and cost-effective services. The controller must run the accounting department as if it were a profit center,
so that the most efficient methods are used to complete each task and the attention of the department is focused squarely on
the most urgent tasks.

Technical knowledge. Creating an accurate financial statement, especially one for a publicly held company, requires a considerable
knowledge of accounting rules and regulations. Accordingly, a controller should be thoroughly versed in all generally accepted
accounting principles (GAAP). Also, if the controller’s company deals with international financial report- ing standards (IFRS), a
knowledge of IFRS will also be necessary.

Below these managers are a number of subcategories, staffed either by clerks or degreed accountants, who are respon- sible
for specific tasks. These subcategories are:

Cost accounting. This position is filled by a degreed accountant who conducts job or process costing and verifies the inventory
valuation.

Financial analysis. This position is filled by a degreed accountant who compiles both standard and special-request analysis reports.

Financial reporting. This position is filled by either a degreed accountant or a senior-level bookkeeper who prepares the financial
statements and accompanying footnotes, as well as other periodic reports for public consumption if the company is publicly held.

General ledger accounting. Frequently combined with the financial reporting function, this is staffed by similar personnel and is
involved with the review and recording of journal entries and summary entries for subsidiary journals.

Payroll processing. This position is filled by clerks who calculate pay levels and hours worked and generate payments to employees.

Tax form preparation and filing. This position is filled by a degreed accountant, frequently with tax experience in a public
accounting background, who completes and files all government tax forms.

Transaction processing. This position is filled by clerks (usually comprising the bulk of all department headcount) who process all
accounts payable, accounts receivable, and cash application transactions in accordance with rigidly defined procedures.

The positions most likely to be needed by a controller are those responsible for transactions, which are the clerks
responsible for billing, collections, payables, and payroll. Here are the job requirements for these positions:

Billing Clerk: This position is accountable for creating invoices and credit memos, issuing them to customers by all
necessary means, and updating customer files. Principal accountabilities are:
 Issue invoices to customers
 Issue monthly customer statements

Collections Clerk: This position is accountable for collecting the maximum amount of overdue funds from customers, which may
include a variety of collection techniques, legal claims, and the selective use of outside collection services. Principal
accountabilities are:
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 Stratify collection activities to maximize cash receipts
 Issue dunning letters to overdue accounts
 Contact customers regarding overdue accounts
 Issue payment commitment letters

Payables Clerk: This position is accountable for verifying proper payment approval, processing payments in a timely
manner, and ensuring that discounts are taken. Principal accountabilities are:
 Match supplier invoices to authorizing purchase orders and proofs of receipt
 Take all economical supplier discounts
 Obtain payment approvals for non–cost of goods sold invoices
 Process expense reports

Payroll Clerk: This position is accountable for collecting timekeeping infor- mation, incorporating a variety of deductions into a
periodic payroll, and issuing pay and pay-related information to employees. Principal account- abilities are:
 Collect and summarize timekeeping information
 Obtain supervisory approval of time card discrepancies
 Obtain overtime approvals
 Calculate commissions
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Chapter 2 Internal Control
Many policies and procedures have been established to achieve the specific objectives of an organization. This set of
procedures is called the internal control structure. Technically, appropriate control procedures apply to every function, to
every activity of the enterprise. The emphasis in this chapter is on those controls relevant to a proper recording of
transactions (income, expenses, assets, liabilities, and net worth) and the proper reporting thereof, together with safeguarding
the assets of the business. The applicable control objectives, discussed later in this chapter, are a basic concern of the
controller.
The controller should be aware of the various types of controls that must be interlinked to create a control system that
adequately safeguards the company assets: accounting controls, administrative controls, and primary operational controls.
Accounting controls are defined as the plan of organization and all methods and procedures that are concerned with the
safeguarding of assets and the reliability of the financial records. They generally include such controls as the systems of
authorization and approval; separation of duties concerned with record-keeping and accounting reports from those concerned with
operations or asset custody; physical controls over assets; and internal auditing. It was these controls with which historically the
independent accountant was pri- marily concerned.
Administrative controls comprise the plan of organization and all methods and procedures that relate to operational
efficiency and adherence to mana- gerial policies and that usually are concerned only indirectly with the financial records.
Included would be such controls as statistical analyses, time and motion studies, performance reports, employee training
programs, and quality control.
Primary operational control concerns the establishment of policy and basic guidelines by which an enterprise will be
directed as a means of achieving the business objectives.
Given the recent broadening of the traditional definition of controls, and the various statements on the subject, it facilitates
discussion if the internal control structure of an entity is divided in two parts:

1. Control environment
2. Accounting systems

The control segment has recently been given increased importance in general analysis of controls. It represents the collective
effort of many factors, including:
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Management philosophy and operating style. This factor concerns ‘‘the tone at the top’’ and includes a broad range of topics
that influence the control environment, including:
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Emphasis on meeting profit goals, targets, or budgets
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Basic attitude about risk taking
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Attitude about the need for controls
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Attitude about the importance and sanctity of the financial statements, both internal and published
 Organization structure. How are the organizing, planning, directing, and controlling of operations handled? On a
decentralized basis? Does strong central control exist? Does one person or do a few individuals dominate the company?
 Functioning of the board of directors and the board committees. Does the board exert influence or largely follow the dictates
of the CEO? Does it examine or discuss important policies and procedures? Does an audit committee composed of outside
directors exist? Does it oversee accounting policies and procedures, including controls? Does it meet independently with the
outside auditors and with internal auditors?
 Methods of assigning authority and responsibility. Are policy matters such as ethical standards, conflicts of interest, and
competitive response discussed?
 Management control methods. This category involves the heart of opera- tional control—how management delegates
authority to others and effectively supervises all company activities—and includes:
o The planning system, both short and long term
o The measurement system, comparing actual with planned perform- ance, and communication of the results to
appropriate individuals
o The methods of taking timely and corrective action to bring actual performance at least to budgeted levels
o The methods of developing procedures, modifying systems, and monitoring systems and procedures
 The existence and effectiveness of an internal audit function. Included in the audit function are the proper authority,
organization structure and status, properly qualified personnel, and adequate resources.
 Personnel policies and procedures. This category includes policies and pro- cedures for hiring, training, evaluating,
promoting, and compensating personnel so that a proper and adequate corps of employees is available and permitted to
carry out their assigned responsibilities.
 Influence of external factors. Although external influences are largely outside the control of an organization, how
management monitors and deals with outside influences, such as legislative and regulatory bodies, international events,
and economic trends, and how it complies with the requirements, is germane to accomplishing the company’s
objectives.
Accounting System
Another element of the internal control structure is the accounting system. The proper direction of the accounting system is one of
the principal responsibilities of the controller. An effective accounting system encompasses those principles, methods, and
procedures, as well as those records that will:

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Identify properly and record all valid transactions
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Describe the transactions on a timely basis and in sufficient detail to permit proper classification of transactions for financial
reporting
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Determine the time period in which the transactions occurred so as to permit recording in the proper accounting period
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Measure the value of the transaction in a manner that permits recording of the proper monetary value in the
financial statements
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Permit proper presentation of the transactions and related required dis- closures in the financial statements
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There are two fundamental steps to be taken by management in evaluating internal controls. First, management must
identify the principal activities, risks, and exposures in each operating component of the business and define the control
objectives related to those activities. Second, manage- ment must describe, perhaps by flowcharts, and understand the various
systems used to process transactions, safeguard assets, and prepare the financial reports. Management then uses this
information to evaluate the system, giving particular attention to possible significant weaknesses, in order to ascertain that
the system provides reasonable assurance that the control objective can be achieved.

Suggested components are sales, production or service, finance, and administration. Examples of control objectives are:

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Sales control objectives. That correct billings are produced for shipped products or services rendered, customer credit is
checked prior to approv- ing orders, and customer returns are approved.
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Production or service control objectives. That minimal scrap occurs as products are created, the correct quantities of
products are produced, and pilferage is kept to a minimum.
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Finance control objectives. That cash receipts are deposited on the day of receipt, petty cash is issued only with proper
authorization, and bad debts are properly authorized before being removed from the receivables ledger.
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Administration control objectives. That office equipment is purchased only with the proper authorization, vacations are
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taken only with previous authorization, and hiring occurs only after proper authorization.

When reviewing the flowcharts for control weaknesses, five general control objectives should be kept in mind:

1. Authorization. Was the transaction authorized by management? This could be evidenced in a general way by establishing
related policies, contract authorization limits, investment limits, standard price lists, and so on. Or, in a given situation, a
specific authorization may be needed.
2. Recording. Transactions should be recorded in the proper account, at the proper time (proper cutoff), with the proper
description. No fictitious transactions should be recorded, and erroneous material or incomplete descriptions should be
avoided.
3. Safeguarding. Physical assets should not be under the physical custody of those responsible for related record-keeping
functions. Access to the assets should be restricted to certain designated individuals.
4. Reconciliation. Periodic reconciliations of physical assets to records, or control accounts, should be made. Some examples are
bank reconciliations,
securities inventories and physical inventories of raw material, and work in process and finished goods to control
accounts.
5. Valuation. Provision should be made for assurances that the assets are properly valued in accordance with generally
accepted accounting principles—and that the adjustments are made.

LEVELS OF CONTROLS

All these levels can be included in three groups:

1. Strategic. Board of directors and top management, who plan and control:
 Organizational structure
 Corporate goals and objectives
 Long-range planning procedures
 Marketing policy decision making
 Management policy decision making
 Financial policy decision making
2. Tactical. Board of directors and senior management, who plan and control:
 Annual profit plans
 Executive–personnel policies (inventories, replacement)
 Capital expenditures
 Annual research and development plan
3. Operational, where planning and control involves:
 Credit approval practices
 Treatment of uncollectible account
 Pension plan performance
 Billing procedure
 Salary and wage authorization
 Purchasing procedure
4. Operational, where planning and control involves:
 Credit approval practices
 Treatment of uncollectible account
 Pension plan performance
 Billing procedure
 Salary and wage authorization
 Purchasing procedure
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Fraud is an intentional financial misstatement or the misappropriation of funds. Fraud is not an unintentional mistake, such
as an incorrect accounting estimate, the application of a cost to an incorrect account, or a lost inventory tag during a
physical count.

Common Types of fraud

 Generate bills from nonexistent companies.

 Pay personal bills
 Alter approved expense amounts
 Rig bids between purchasers and suppliers
 Submit multiple expense receipts
 Cancel reimbursed education
 Sell company assets

The conditions that lay the foundations for fraud include:

 Poor internal controls or a poor internal control environment
 Existence of heavy financial pressures on individuals
 Other sources of pressure
 Contributing conditions

Some of the areas where management override is more common include:

 Reserve estimates
 Depreciation allowances
 Sales
 Cost of sales.
 Deferring expenses

. What is internal control? And give example.

 Internal control refers to the ideas, policies, and practices that businesses establish to make sure they monitor risk factors and
address them to prevent losses or fraud.
Example: Segregation of Duties, when tasks are divided or separated among multiple workers to lower the possibility of error or
improper behavior

What is FRAud? Give example.

 Fraud is the intentional manipulation of financial information or the theft of funds.

 Embezzlement
 Forgery or alteration of documents
 Unauthorized alteration or manipulation of computer files
 Fraudulent financial reporting