Fast Close

STEVEN M. BRAGG, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte & Touche. He received a master's degree in finance from Bentley College, an MBA from Babson College, and a bachelor's degree in economics from the University of Maine. He has been the two-time president of the Colorado Mountain Club, is an avid alpine skier and mountain biker, and is a certified master diver. Mr. Bragg resides in Centennial, Colorado. He is also the author of Accounting Best Practices and Accounting Policies and Procedures Manual, both published by Wiley.

Preface xv

Chapter 1 Introduction 1

Different Types of Fast Close 1

Benefits of the Fast Close 2

Legal Issues Impacting the Fast Close 3

Steps to Achieve a Fast Close 4

Summary 6

Chapter 2 Your Current Closing Process 7

Traditional Closing Process: Basic 7

Additional Closing Tasks for the Multidivision Company 11

Additional Closing Tasks for the Multinational Company 12

Additional Closing Tasks for the Public Corporation 12

Problems with the Closing Process 13

Summary 17

Endnote 17

Chapter 3 Conducting a Review of the Closing Process 19

Steps in the Process Review 19

Payables Process Review 22

Billing Process Review 22

Inventory Process Review 24

Cash Process Review 26

Final Closing Process Review 26

Total Duration of the Closing Process 29

Summary 29

Endnote 29

Chapter 4 Alter the Timing of Closing Activities 31

Altering the Closing Mindset 31

Review and Correct Subledger Transactions Throughout the Month 32

Complete the Bank Reconciliation Every Day 32

Review Uncashed Checks 33

Update the Inventory Obsolescence Reserve 33

Determine the Lower of Cost or Market 33

Calculate Overhead Allocation Bases 33

Bill Recurring Invoices 34

Conduct a Preliminary Comparison of the Shipping Log to Invoices Issued 35

Review Preliminary Rebillable Expenses 35

Update the Bad Debt Reserve 35

Review Preliminary Billable Hours 36

Accrue Interest Expense 36

Determine Pension Plan Funding 36

Determine Flexible Spending Account Funding 37

Accrue Unpaid Wages 37

Accrue Unused Vacation Time 38

Accrue Travel Expenses 38

Reconcile Asset and Liability Accounts 39

Calculate Depreciation 39

Compile Preliminary Commissions 40

Review Financial Statements for Errors 40

Complete Selected Financial Reports in Advance 41

Deferred Closing Activities 42

Summary 46

Chapter 5 Revise the Contents of the Financial Statements 47

Alter the Mode of Report Delivery 47

Standardize Reports 48

Eliminate Cost Reporting from the Reporting Package 49

Separate Metrics from the Financial Reporting Package 49

Summary 50

Chapter 6 Optimize the Use of Journal Entries and Chart of Accounts 51

Eliminate Immaterial Journal Entries 51

Standardize Journal Entries 52

Convert to Recurring Journal Entries 53

Centralize Use of Journal Entries 54

Use Journal Entries to Accrue Expenses Delaying the Close 54

Automate Journal Entry Postings 55

Use Accruals Only for External Reporting 55

Define Accounts 55

Standardize the Chart of Accounts 56

Automate Eliminations of Intercompany Transactions 57

Summary 57

Chapter 7 Standardization and Centralization 61

Impact of Standardization on the Closing Process 61

Impact of Centralization on a Multilocation Accounting Department 63

Impact of Centralization on a Single-Location Accounting Department 65

Incorporating Standardization and Centralization into Acquisition Activities 66

Summary 68

Chapter 8 Closing the Inventory Function 69

Create an Inventory Tracking System 69

Implement Cycle Counting 73

Reduce the Amount of Inventory 77

Properly Record the Lower of Cost or Market Rule 84

Reviewing Obsolete Inventory 85

Preventing Obsolete Inventory 87

Summary 89

Endnotes 91

Chapter 9 Closing the Billing Function 93

Bill Recurring Invoices in the Preceding Month 93

Computerize the Shipping Log 94

Eliminate Rebillable Expense Processing from the Core Closing Period 95

Eliminate Month-End Statements 96

Print Invoices Every Day 96

Transmit Transactions via Electronic Data Interchange 97

Summary 97

Endnote 99

Chapter 10 Closing the Payroll Function 101

Automatically Calculate Commissions in the Computer System 101

Simplify the Commission Structure 102

Install Incentive Compensation Management Software 103

Post Commission Payments on the Company Intranet 103

Avoid Adjusting Preliminary Commission Accrual Calculations 104

Use a Bar-Coded Time Clock 105

Use a Web-Based Timekeeping System 106

Automate Vacation Accruals 107

Merge Sick Time into Vacation Time 108

Cap the Amount of Vacation Time to Be Carried Forward 108

Summary 110

Endnote 110

Chapter 11 Closing the Payables Function 111

Automate the Month-End Cutoff 111

Pay Based on Receiving Approval Only 112

Automate Three-Way Matching 114

Reduce Required Approvals 115

Use Negative Assurance for Invoice Approvals 117

Use Procurement Cards 117

Have Suppliers Include Their Supplier Numbers on Invoices 122

Receive Billings Through Electronic Data Interchange 123

Request That Suppliers Enter Invoices Through a Web Site 124

Audit Expense Reports 125

Automate Expense Reporting 127

Link Corporate Travel Policies to an Automated Expense Reporting System 128

Issue a Standard Account Code List 129

Link Supplier Requests to the Accounts Payable Database 130

Automate Payments for Repetitive Processing 131

Eliminate Manual Checks 132

Use a Signature Stamp 133

Ignore Supplier Invoices and Pay from Statements 134

Issue Standard Adjustment Letters to Suppliers 135

Summary 135

Endnote 135

Chapter 12 Closing the Cash Processing Function 137

Access Bank Account Information on the Internet 137

Avoid Delays in Check Posting 138

Collect Receivables Through Lockboxes 138

Install a Lockbox Truncation System 140

Access Online Check Images from a Lockbox 141

Consolidate Bank Accounts 141

Summary 142

Endnote 142

Chapter 13 Impact of Automation on the Closing Process 143

Principles of Fast Close Automation 143

Implement Minor Programming Changes on an Ongoing Basis 144

Automate General Ledger Interfaces 145

Install a Web-Based Timekeeping System 145

Install a Workflow Management System 147

Install Consolidation Software 148

Install a data Warehouse 148

Install an Enterprise Resources Planning System 149

Summary 151

Chapter 14 Closing the Books of a Public Company 153

Overview 153

Constructing the SEC Filing 153

Quarterly Auditor Reviews and Audits 157

Quarterly Legal Review 160

Officer Certification 160

Audit Committee Approval 161

EDGARizing 162

Summary 162

Chapter 15 Controls for Financial Reporting 165

Overview 165

Controls for Financial Reporting 165

Summary 176

Chapter 16 Ongoing Improvements in the Closing Process 177

Ongoing Improvement Process 177

Improvement Measurements 179

Summary 180

Appendix A Comprehensive Closing Checklist 181

Appendix B Fast Close Policies and Procedures 185

Appendix C Soft Close Checklist 197

Appendix D Year-End Close Checklist 201

Index 205