Fool Proof Accounting = Good, Useful Reporting

Everyone loves sexy information dashboards that they can use to do things like manage a small business effectively.  But here is the deal: if the information in that dashboard is wrong and/or not timely or is otherwise not trustworthy; then what good is the dashboard? (Below is BlueIQ)

I am a certified public accountant (CPA) and have been doing financial accounting for about 45 years with a focus on accounting information systems.  In addition, I studied and received an MBA in what was then  referred to as "world class manufacturing techniques" then and is now called Lean Six Sigma.

Many small businesses (and a lot of big businesses) have problems with their reporting systems because information that is put into their systems is incorrect or incomplete.  Further, the systems are not set up well which causes further struggles when you try and get information out of the system.  Another problem is that descriptive metadata that helps you get information out of the system effectively is not put into the system at all or added to the system late in the process which causes problems getting information in a timely manner.  Another big problem is trying to figure out where in the accounting system database information is stored so that you can get the information out of the system and put that information into a report.

The larger an organization gets, the higher the probability that multiple systems exist to store information and the systems don't talk to one another effectively.  The typical solution today?  Hire expensive accountants and IT people to overcome these integration problems, delay reporting so problems can be fixed, or rekey or copy/paste information, etc.

But, there is a better way.  Build better systems.

Lean Six Sigma has a principle referred to as the "1-10-100 rule" that helps you understand the true cost of poor quality.  For every $1 you spend to fix a system to get rid of a problem; you would spend $10 to discover errors and then fix those errors; or you would spend $100 to deal with the consequences of that mistake if the mistake is not detected and corrected.

These are the problems I see with financial accounting systems over and over and over:

1. Inadequate account type scheme: Accounting systems generally have a scheme for assigning a "type" to an account; basically a method of classifying the accounts in a chart of accounts.  Categories tend to be "Assets", "Liabilities", "Equity", "Income", "Expenses".  Or, there may not be an account type.  This is completely inadequate and causes problems.  This problem tends to be caused by the design of an accounting system. Proper account types need to be used to avoid work later.
2. Poorly set up chart of accounts: It has been my observation that accountants are very good at working with accounting systems; but they are terrible at setting those systems up.  A key to setting an accounting system up effectively is to create a good, well-thought-out chart of accounts that help you report rather than getting in the way.
3. Missing transaction metadata:  Critically important information that enables the proper categorization of transactions tends to be missing from accounting systems and then added later in the process, generally using spreadsheets.  To understand this issue, let me point out how Workday solves this issue.  Workday, an ERP system, has the notion of the "work tag".  (see this explanation and this article by Workday)  A work tag is an informal approach to adding this missing transaction metadata.
4. Recording business event information incorrectly: There are many reasons business event information gets recorded incorrectly, those reasons tend to fall in the following buckets: poorly trained personnel, bad mismatch of skills/experience to tasks being performed, bad accounting system design, sloppiness.
5. Delays in fixing mistakes: Any delay in fixing a mistake causes potential mistakes in using that information.  First, systems should be fixed so mistakes are avoided.  But if a mistake does occur, that mistake should be detected and fixed as soon as possible.  Waiting until the end of the month or end of the year and letting the CPA fix it is not a good strategy.
6. Avoid spreadsheets:  Spreadsheets are not a solution to a problem; they are the problem. Spreadsheets tend to be informal work-arounds.
7. Overly manual process control mechanisms:  Process control mechanisms today tend to be overworked accounting professionals that have to manually control process quality.  This manual approach is expensive, not reliable enough, and ultimately causes more important work to be delayed or simply left undone as the current, immediate crisis is addressed.  The fix?  Augment manual processes with automated processes and let machines help overworked humans get work done.  Leverage things like Lean Six Sigma philosophies and techniques.

Fundamentally, don't fight symptoms; solve the problem that is causing the symptom.  This can be hard at times but the proper investments in the right areas will pay dividends in the long term.  Financial reporting is a manufacturing or construction process. What is manufactured/constructed is the information.

Additional information:

• Pennylane aims to become the de facto financial management and accounting platform for startups, SMEs, and their accountants
• AmplifyingQuality
• How Many Spreadsheets does it Take to Run a Fortune 500 Company?
• PerfectXL