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Financial Statements Best Practices
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slight change in the financial results will not have a noticeable impact on the
decision making of the managers, stock analysts, or creditors who review the
financial statements. So, despite an inordinate amount of extra effort, no one
really cares about the slightly more accurate results.
The answer to this problem is to review all existing accruals and throw out
all of the ones that result in only very small accrual amounts. By doing so, less
time is needed to produce the financial statements, opening up resources for other
uses. However, when conducting the accrual review, it is important to check on a
number of past journal entries to ensure that each accrual is always a small one—
if there is even a slight chance of an accrual occasionally being a large one, it is
best to keep it in place on the grounds that financial statement accuracy could be
severely impacted by its absence at some point in the future. Thus, as long as an
appropriate degree of caution is used when eliminating accruals from the finan-
cial statement closing procedure, it is reasonable to permanently eliminate the
use of small accruals.

Cost: Installation time:

12–11 REDUCE INVESTIGATION LEVELS

Before issuing the financial statements, they are subject to an intensive review
by the controller, who compares each line item to the budgeted level and thor-
oughly investigates each item that varies significantly from the budget. This is
an admirable and necessary practice, since it catches errors and also prepares the
controller for any questions from the management team regarding those same
variances. However, the practice can be taken too far. For example, it is almost
impossible for any revenue or expense line item to match exactly the budgeted
amount (unless it is related to a long-term contract that ensures totally pre-
dictable amounts), so a controller who investigates virtually all variances will be
doomed to review every line item in the general ledger. This is an enormous task
and also an unnecessary one, for the vast majority of variances are so small that
there is no point in reviewing them—even if there is an error somewhere, the
total impact is so insignificant that there will be no noticeable impact on corpo-
rate profitability.
A very simple best practice that eliminates the bulk of this review work is
to reduce investigation levels to the point where only the largest variances are
checked for accuracy. This can take several forms. For example, a minimum
dollar amount, such as $10,000, can be set for the amount of a variance that a
controller will bother to investigate. Alternatively, it can be on a percentage
basis, such as anything over a 30 percent variance. Also, there may be some
accounts, such as payroll, that are better reviewed by checking headcount fig-
ures each month, thereby entirely eliminating them from the variance analysis.
The best approach is usually a combination of all three techniques, which means