Wednesday, August 20, 2008

The Current Ratio: Final Thought (I Hope!)

I am now a participant in the Accelerator program from Entrepreneurs' Organization. Excellent program.

A key part of the program is the quarterly all day sessions. Yesterday was my second session since joining. Both have been moderated by Jim Ryerson of Sales Octane, and he is outstanding. Yesterday's session was "Money Day" and focused on helping entrepreneurs better understand their financial statements, what to look at, what to track, etc. Being a CPA I was kind of familiar with the material, but I did get to share my expertise with the group.

Anyway, time was spent on the importance of the current ratio. It was also suggested that you track it over time.

Readers of this blog know my feelings on the current ratio. And then my additional feelings on it. I was biting my tongue the whole time, as I didn't want to mess with the curriculum.

So I will say this: The current ratio is easily manipulated. If you aren't going to manipulate it, and you do things on a consistent basis from month to month, it can be a good yardstick to measure how you are doing.

But I still don't like the current ratio.

Tuesday, August 12, 2008

Convergence: It's Coming

Dictionary.com defines convergence as an act or instance of converging. Very helpful.

Converging is defined by them as to tend to meet in a point or line; incline toward each other, as lines that are not parallel.

And that is what is going on with accounting standards.

The world keeps getting smaller and that is making it more difficult for investors to compare financial results from companies in different countries. As a result, their is a major push towards converging US accounting standards with international accounting standards. Adopting International Financial Reporting Standards ("IFRS") will represent a significant change for not just accountants like me, but the entire US economy. Nearly 100 countries currently require or allow the use of IFRS for financial reporting by publicly held companies. Canada will require IFRS by 2011, as will Japan. The US probably won't be far behind.

I'll try and write about this more in the coming months. In the meantime, there is plenty of information on a new AICPA sponsored website: http://www.ifrs.com/index.html

Friday, August 8, 2008

Mandatory Vacations - A Great Fraud Fighter

A common question in internal control questionnaires is whether the entity requires mandatory vacations. The reason for this is quite sound - perpetuating the fraud often requires the fraudster always be there. If someone else takes over their responsibilities even for the week, they may find something amiss and the fraudster is caught.

I enjoy reading case studies on fraud - what methods were used, how long it lasted, and how the fraud was detected. You often will see a quote in the case studies that goes something like this "Suzanne was the last person we expected to commit a fraud. She was so loyal - she worked here for seven years and never took a day off." Sadly, the entity by then has learned why Suzanne never took any time off.

I'm continuing to read the ACFE's 2008 Report To The Nation on Occupational Fraud & Abuse and was reminded of this while reading Chapter 4 on Victim Organizations. Mandatory vacation policies (and job rotation) were in place in 12.3% of the fraud cases covered by the report. The median loss when this policy was in place was $64,000. The median loss when this policy was not in place was $164,000.

If you do not have mandatory vacation policies, you should strongly consider implementing this policy.

Friday, August 1, 2008

What I Still Think Is The Best Fraud Defense For A Small Business

One of the first frauds I ever investigated would probably never have happened if the owners looked at the monthly bank statements. Then they would have seen the checks going out to unauthorized vendors. Like the bookkeeper's credit card company. And her cable television bill. And checks to various fraternal organizations she was a part of.

If they had reviewed the bank statement they wouldn't have lost $125,000 to her over 5 years. And it isn't like it happened evenly over the 5 years. Like many frauds, she started small, and built up as she knew she could get away with it.

The naysayer in the crowd will point out how many banks won't send cancelled checks back. That's true. But copies are still available, often online, which will serve the same purpose.

And if you want to take things one level further - have the bank statements sent to the owner's house. That way they can't be altered by the fraudster.

The simple things can make all the difference.