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CHAPTER ONE
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Accounting in the
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Corporation
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Importance of This Chapter
Though this chapter is relatively short, the new controller should read
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it carefully and ponder the key topics of discussion. We point out that
the accounting function is extremely complex, both in terms of tasks
and global reach as well as in its impact on other parts of the business.
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In many respects, the controller position has the most far-reaching
impact of any management position, so the new controller must spend
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time considering how he or she will fit into the complex gearing of the
modern corporation in order to achieve the greatest positive impact.
Further, ethical issues arise more frequently in the accounting field
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than in most other areas, so the controller must be aware of these
issues and understand the process for dealing with them.
The role of the accounting staff used to be simple enough—just process a
basic set of accounting transactions and convert them into financial statements
at month-end. The role has undergone a vast change in the last few decades, as
technological improvements and a shifting view of management theory have
resulted in a startlingly different accounting function. This chapter describes
how the accounting function now incorporates many additional tasks and can
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2 ◾ Accounting in the Corporation
even include the internal auditing and information technology functions in
smaller organizations. It then goes on to describe how this functional area fits
into and serves the needs of the rest of the company, and how the controller
fits into the accounting function. Finally, there is a discussion of how ethics
drives the behavior of accounting employees, and how this shapes the way the
accounting staff and controller see their roles within the organization.
In short, this chapter covers the high-level issues of how the accounting
function and its controller fit into the modern company, not only to process
its transactions, which was its traditional role, but also to provide additional
services.
TASKS OF THE ACCOUNTING FUNCTION
The accounting function has had sole responsibility for processing the bulk of a
company’s transactions for many years. Chief among these transactions have
been the processing of customer billings and supplier invoices. Though these
two areas comprise the bulk of the transactions, there has also been a long
history of delegating asset tracking to the accounting function. This involves
all transactions related to the movement of cash, prepaid assets, inventory, and
fixed assets. Finally, the accounting staff has been responsible for tracking debt,
which can involve a continuous tracking of debt levels by debt instrument, as
well as the payments made to reduce them.
A multitude of changes in the business environment have altered the role of
the accounting function. One change has been the appearance of the informa-
tion technology function. In a larger company, this function is managed within
its own department and does not fall under the responsibility of the controller.
However, it is common for the information technology group to fall under the
management umbrella of the controller in a smaller company. Likewise, the
internal auditing function frequently falls under the controller’s area as well.
This function has expanded in importance over the last few decades as companies
realize the benefits of having an internal watchdog over key controls. Though it
should report directly to the board of directors or the chief financial officer (CFO),
it is common for a small internal auditing staff to report instead to the controller.
Besides adding new functional areas, the accounting staff has other new
responsibilities that have arisen due to the increased level of competition.
With worldwide barriers to competition crumbling, every company feels the
pinch of lower competitive prices and now asks the accounting staff to provide
analysis work in addition to the traditional transaction processing. These tasks
Tasks of the Accounting Function ◾ 3
include margin analysis on existing or projected product lines, geographic sales
regions, or individual products.
Targeted Financial Analysis
O ne of the controller’s key tasks is proactively analyzing company
issues and recommending changes. In one case, a new controller
solved a company’s low-profitability problems by preparing a one-page
grid showing the sales volume and profitability of every customer. The
president promptly dropped most of the customers having low volume
and low margins, resulting in the company deliberately losing 1/3 of its
customers—and raising its profitability. ◾
Also, different organizational structures complicate the job of the con-
troller. For example, there may be a number of subsidiaries that were created
specifically to reduce the taxes on newly acquired businesses, or to take advan-
tage of tax rates in different government jurisdictions. These situations greatly
complicate the accounting work of the accounting staff, particularly in regard
to consolidating the results of the various entities.
There are also continuing changes to the various accounting frame-
works, such as generally accepted accounting principles (GAAP) or interna-
tional fi nancial reporting standards (IFRS), which require considerably more
complicated accounting for some situations. For example, the controller may
be called on to capitalize the interest expense associated with a fi xed asset
under construction, or to accrue a liability for an asset retirement obligation.
In addition, the accounting staff may even be asked to serve on new prod-
uct design teams, so that they can determine the projected cost of new prod-
ucts, especially in relation to target costs. Further, the accounting staff must
continuously review and report on nonproduct costs, which can range from
advertising to utilities. This level of cost review and reporting calls for highly
trained cost accountants and financial analysts, almost always with college
degrees and professional certifications, to conduct the work.
The world of business has become more international. Many companies
are doing an increasing volume of business with companies based in other
countries. This greatly increases the complexity of accounting, for a company
must now determine gains and losses on sales to other countries. In addition,
if there is no separate finance function, the accounting staff may be called on
to handle letters of credit and hedging transactions that are designed to reduce
the level of risk that goes with foreign exchange dealings.
4 ◾ Accounting in the Corporation
In the face of more intensive competition, many companies are also
merging or acquiring subsidiaries. This adds a great deal of complexity to the
accounting staff’s work, for it must now coordinate a multitude of additional
tasks in other locations. This includes setting up standard procedures for the
processing of receipts, shipments, and cash. Also, closing the financial books at
the end of each reporting period becomes much more complex, as the account-
ing staff must now coordinate the assembly and consolidation of information
from multiple subsidiaries. Even if a company decides to consolidate all of its
accounting facilities into one central processing location to avoid all this trou-
ble, it still requires the management expertise to bring together the disparate
accounting systems into a smoothly operating facility. This is not an easy task.
The environment of mergers and acquisitions greatly increases the skill needed
by the accounting staff.
The tasks of the accounting function are itemized below. The tasks that
belong elsewhere—but are commonly given to the accounting staff in a small
company—are noted under a separate heading.
▪▪ Traditional accounting tasks
▪▪ Accounts payable transaction processing
▪▪ Accounts receivable transaction processing
▪▪ Asset transaction processing
▪▪ Debt transaction processing
▪▪ New accounting tasks
▪▪ Coordination and consolidation of accounting at subsidiaries
▪▪ Currency translations
▪▪ Margin analysis
▪▪ Nonproduct cost analysis
▪▪ Selection, implementation, and operation of accounting software and
related systems
▪▪ Target costing
▪▪ New tasks assigned to the accounting function of smaller companies
▪▪ Information technology systems installation and maintenance
▪▪ Hedging, foreign exchange, and letter of credit transactions
▪▪ Internal auditing programs
Given today’s highly volatile and ever-changing business environment, the
only safe statement to make about the new activities presented in this section
Role of the Accounting Function ◾ 5
is that they will only become more complex, requiring even greater levels of
skill by the accounting staff and its management team.
ROLE OF THE ACCOUNTING FUNCTION
Having noted the expanded number of tasks now undertaken by the modern
accounting function, it is important to also note how the role of the accounting
staff has changed in relation to the rest of the company.
When the number of accounting tasks was more closely defined around
transaction processing, it was common for the accounting staff to be housed
in an out-of-the-way corner of a business, where it would work without being
impeded by other functions. Now, with a much greater number of tasks, the
accounting staff finds itself involved in most major decisions. For example, the
cost accountant is expected to serve on product design teams and to let other
team members know if new designs will have costs that will meet targeted cost
goals. An accounting analyst may be asked by the sales manager to evaluate
the profitability of a lease deal being extended to a customer. The controller may
be involved in integrating the accounting functions of an acquired business.
The accounts receivable clerk may work with the sales staff to collect over-
due invoices from customers. And in general, the entire accounting staff may
be called on to issue financial reports to other parts of the business, possibly
with accompanying formal presentations. For these reasons and others, the
accounting function now finds itself performing a variety of tasks that make it
an integral part of the organization.
A particularly important area in which the role of the accountant has
changed is related to processes. When another area of the company changes
its operations, the accounting staff must devise alterations to the existing
accounting systems for processing transactions that will accommodate those
changes. For example, if the manufacturing function switches to the just-in-
time production methodology, this has a profound impact on the way in which
the accounting staff pays its bills, invoices customers, monitors job costs, and
creates internal reports. Also, if the materials management staff decides to use
material requirements planning or integrated distribution management sys-
tems, the accounting software should be interfaced to these new systems. To
alter its processes, the accounting staff must fi rst be aware of these changes,
requiring the accounting staff to engage in more interaction with other parts
of the company to find out what is going on.
6 ◾ Accounting in the Corporation
A company may find that it has to streamline various aspects of its opera-
tions in order to lower its costs and remain competitive. This can be a problem
for the controller, who may fi nd key controls being eliminated at the same
time. This requires a fresh view of which controls are really needed to mitigate
risks, and a considerable amount of diplomacy in extending the viewpoint of
the controller regarding this issue to the rest of the company. The result may
be that some controls must be modified, replaced, or eliminated.
It is very important to develop strong relationships with key suppliers and
customers. These business partners will demand extra services, some of which
must be fulfilled by the accounting staff. These changes may include the online
submission of invoices, providing special billing formats to customers, or paying
suppliers by electronic transfer. If these steps are needed to retain key business
partners, then the accounting staff must be willing to do its share of the work.
Too frequently, the accounting staff resists these sorts of changes on the grounds
that all transactions must be performed in exactly the same manner with all busi-
ness partners. The accounting department must realize that altering its way of
doing business is sometimes necessary to support ongoing business relationships.
In short, altering the focus of the accounting staff from an introverted
group that processes a few traditional transactions to one that actively works
with other parts of a company and alters its systems to accommodate the needs
of other departments is required in today’s business environment.
ROLE OF THE CONTROLLER
The controller has traditionally been the one who supervises the accounting
department, reviews systems, and delivers financial statements. Though the
details of the position are covered in Chapter 2, suffice it to say here that the
position has expanded to a great extent. As noted earlier in this chapter, the
accounting function as a whole is now required to take on additional tasks,
to work with other departments more closely, to continuously offer advice to
senior management, and to alter systems and controls to match the changing
needs of other areas of the company. All of these changes have had a massive
impact on the role of the controller within the organization.
The key factor is that, due to the vastly increased interaction with other
departments, the controller must be highly skilled in interdepartmental
dealings. This involves constant interactions with fellow department heads,
attendance at meetings, and the issuance of opinions on a variety of topics
regarding the operation of functions with which the controller previously
Role of the Controller ◾ 7
had no connection. Because of this changed role, the controller must now
have top-notch interpersonal and management skills—the former to deal
with other departments and the latter to oversee the expanded role of the
accounting department.
Forming Alliances
T he controller position impacts nearly every part of the company. If the
new controller is to succeed in the position, it is extremely important
to build strong relationships with the managers of other departments.
For example, if there is a large inventory investment, be sure to form
a strong bond with the warehouse or materials manager. Also, do not
ignore informal lines of communication; in many instances, a very senior
person in an innocuous job may have considerable informal control
over key functions. In one instance, the author found that the person in
charge of developing sales proposals had the best overall knowledge of
company operations! ◾
In addition, the controller must govern a group of employees that is much
more educated than was previously the case. This requires constant attention
to the professional progress of each person in the department, which requires
goal setting, mutual discussion of training requirements, and continuous feed-
back regarding employee performance. This clearly calls for management skills
of an order far higher than formerly required of a controller that presided over
a clerical function.
Also, the wider range of functions managed by the controller now requires
a wider range of knowledge. A controller now needs at least a passing knowl-
edge of computer systems, internal auditing, and administrative functions,
because this area frequently falls under the controller’s area of responsibility.
In addition, traditional accounting functions have now become more complex;
a controller must know about all of the following:
▪ The costs and risks associated with outsourcing various accounting func-
tions.
▪ The impact of tax laws on how the department collects and aggregates
information.
▪ Changes in accounting standards and their impact on accounting reports.
▪ Changes in the reporting requirements of the Securities and Exchange
Commission (for publicly held companies).
8 ◾ Accounting in the Corporation
It would take a perpetual student to have an in-depth knowledge of all these
areas, so it is more common for the controller to manage a cluster of highly
trained subordinates who are more knowledgeable in specific areas, and who
can provide advice as problems arise.
In short, the role of the controller has expanded beyond that of a pure
accountant to someone with broad management and interpersonal skills who
can interact with other departments, as well as manage the activities of an
increasingly well-educated group of subordinates, while also working with
them to further their professional careers. This is a much more difficult role for
the modern controller, requiring someone with at least as much management
experience as accounting knowledge.
IMPACT OF ETHICS ON THE ACCOUNTING ROLE
With the globalization of business, competition has become more intense. It is
possible that the ethical foundations to which a company adheres have dete-
riorated in the face of this pressure. There have been innumerable examples in
the press of falsified earnings reports, bribery, kickbacks, and employee thefts.
There are vastly more instances of ethical failings that many would perceive
to be more minimal, such as employee use of company property for personal
use, “smoothing” of financial results to keep them in line with investor expecta-
tions, or excessively robust sales or earnings forecasts. The controller and the
accounting staff in general play a very large role in a company’s ethical orienta-
tion, for they control or have some influence over the primary issues that are
most subject to ethical problems—reported earnings, cash usage, and control
over assets. This section discusses how the accounting function can modify a
company’s ethical behavior—for good or bad.
The accounting function can have a serious negative impact on a com-
pany’s ethical standards through nothing more than indifference. For example,
if the controller continually acquiesces to management demands to slightly
modify the financial statements to achieve certain targets, this may eventually
lead to larger and larger alterations. Once the controller has set a standard for
allowing changes to reported earnings, how can the controller define where
to draw the line? Examples of such modifications are:
▪ Allowing sales from the next period to be included in the preceding
accounting period.
▪ Not charging an inventory item to expense, knowing that it is obsolete.
Impact of Ethics on the Accounting Role ◾ 9
▪ Spreading recognition of an expense over multiple periods, when it should
be recognized at once.
▪ Maintaining an inadequate allowance for doubtful accounts.
Another example is when the accounting staff does not enforce control
over assets; if it conducts a fixed-asset audit and finds that a television has been
appropriated by an employee for several months, it can indirectly encourage
continuing behavior of this kind simply by taking no action. Other employ-
ees will see that there is no penalty for removing assets and will then do the
same thing. Yet another example is when the accounting staff does not closely
review employee expense reports for inappropriate expenditures. Once again,
if employees see that the expense report rules are not being enforced, they will
include more expenses in their reports that should not be included. Thus, the
accounting staff has a significant negative influence over a company’s ethical
standards simply by not enforcing the rules.
The previous argument can be turned around for an active accounting
department. If the controller and the rest of the accounting staff rigidly enforce
company policies and procedures and acquire a reputation for no deviations
from these standards, the rest of the corporation will be dragged into line. It is
especially important that the controller adhere closely to the highest standards,
for the rest of the accounting staff will follow the controller’s lead. Conversely, if
the controller does not maintain a high ethical standard, the rest of the account-
ing staff will have no ethical leader and will lapse into apathy. Accordingly, in
a sense, the controller is a company’s chief ethics officer, since the position has
such a strong influence over ethics. It is a rare week that passes without some
kind of ethical quandary finding its way to the controller for resolution.
Drawing the Line
A new controller may have been specifically hired due to lack of experi-
ence, with the management team hoping they can steamroll ethically
suspect business practices past the new hire. Thus it is useful to promptly
inquire into the reason for the last controller’s departure, and to also call
the internal and external auditors to discuss their views of how far the
company has stretched accounting rules in the past. ◾
It is not sufficient to merely say that the accounting staff must uphold high
ethical standards, if the standards are not defined. To avoid this problem, the
controller should create and enforce a code of ethics. This document may not
10 ◾ Accounting in the Corporation
originate with the controller—many chief executive officers (CEOs) and CFOs
prefer to take on this task. However, the controller can certainly push for an
ethical code to be developed higher in the organization. Some illustrative topics
to include in a code of ethics are:
▪▪ Bidding, negotiating, and performing under government contracts
▪▪ Compliance with antitrust laws
▪▪ Compliance with securities laws and regulations
▪▪ Conflicts of interest
▪▪ Cost consciousness
▪▪ Gifts and payments of money
▪▪ Leave for military or other federal service
▪▪ Meals and entertainment
▪▪ Preservation of assets
▪▪ Restrictive trade practices
▪▪ Use of company assets
Once the code of ethics has been created, it must be communicated to all
employees. Once again, this is the CEO’s job, but the controller should con-
stantly reinforce it with his or her staff. It is especially helpful if the controller
visibly refers to the ethical code whenever an ethical issue arises, so that the
accounting staff knows that the controller is decisively adhering to the code.
A code of ethics becomes the starting point in the series of judgments a con-
troller must follow when confronted with an ethical issue. The decision tree is:
▪▪ Consult the code of ethics. Use the code of ethics as the basis for any eth-
ics-related decision. A senior company officer would have difficulty forcing
the controller to adopt a different course of action than what is prescribed
by the code. If the controller feels it is necessary to take a course of action
contrary to what is stated in the code, then document the reasons for doing
so. If there is no code, then proceed to the next step.
▪▪ Discuss with immediate supervisor. The controller’s immediate super-
visor is probably either the CFO, chief operating officer (COO), or CEO. Con-
sulting with them for advice is a reasonable second step in the absence of
a code of ethics. However, if the supervisor is the one causing the ethical
problem, then skip this step and proceed to the next one.
▪▪ Discuss with a trusted peer. There is usually someone within the
company in whom the controller places a great deal of trust. If so, con-
sult with this person in regard to the proper course of action. Be more
Impact of Ethics on the Accounting Role ◾ 11
circumspect in doing so with a person outside the company, since this
runs the risk of spreading information elsewhere, with possible deleteri-
ous consequences. If there is no one with whom to discuss the issue, then
proceed to the next step.
▪ Discuss with the company’s ethics committee. If there is an ethics
committee, this is a good forum for discussion. Unfortunately, many com-
panies do not have such a committee, or it meets so infrequently that the
immediate needs of the controller may not be met through this approach.
In either case, proceed to the next step.
▪ Discuss with the board’s audit committee. Many boards have an audit
committee, which should be comprised entirely of independent directors.
If so, the controller should take his or her concerns to this group. Keep in
mind that this is a serious step, since the controller is now going around the
corporate reporting structure, which may have unenviable consequences
later on if the controller chose not to tell senior management of this action.
▪ Consider leavi ng the company. If all these avenues are untenable
or result in inadequate advice, the controller should seriously consider
leaving the company in the near future. Reaching this final step prob-
ably means that the ethical issue is caused by senior management, and
also that there are no outside checks on their ethical behavior, such as
an audit committee.
Deciding When to Quit
I t is exceptionally damaging for a new controller to be involved in any sit-
uation that has even the slightest taint of accounting scandal, since it is
nearly impossible to be hired into a succeeding job where this problem is
known. Unfortunately, it is frequently better for the new controller to leave
a new position where ethical concerns are rampant, rather than to stay on
the job and attempt to fix the underlying issues. To assist in making the
difficult stay-or-quit decision, consider finding a senior-level mentor who
can offer unbiased advice on the correct course of action. ◾
In summary, the accounting staff has a large role in enforcing ethical stan-
dards throughout a company, since it has such strong influence over several
key areas that require ethical judgments, such as the quality of reported earn-
ings, control over assets, and the uses of cash. Accordingly, it is very much in
the controller’s interests to have a code of ethics that the accounting staff can
adhere to in enforcing the appropriate ethical standards.
12 ◾ Accounting in the Corporation
EVOLVING ROLE OF ACCOUNTING
Though there are many variables that can impact the direction of the account-
ing function and the controller’s role in the future, there are a few broad trends
that are likely to continue, and from which you can predict the evolving role
of accounting.
The accounting function is in the midst of a fundamental change from
being a clerical group without significant training to a cadre of experienced
technicians and managers. Though there will always be a need for clerical help
(indeed, this group will continue to comprise the majority of the department),
there will be an increasing focus on hiring more experienced personnel. This
prediction is based on the technological trend that brings continued levels of
automation to the accounting function, thereby reducing the need for clerks.
Also, the same trend toward more technology means that a greater proportion
of the accounting employees must have better training in how to use the new
hardware and software.
The accounting department is likely to become a more common route to
top management positions. The accounting area has always been a fertile one
for training people in the nuts and bolts of transactions and how they must
function. This is useful for a lower-level manager, but now that the department
also handles a multitude of additional tasks, such as cost analysis, target cost-
ing, and advanced finance functions, it becomes a much better training area
for higher-level managers. The company of the future will not only see large
numbers of well-trained people advancing out of accounting, but they will also
see a large proportion of new recruits clamoring to get into it, so that they too
can receive the necessary training and experience.
This section discussed some evolutionary changes to expect in the role
of the accounting function and the controller. It is likely that there will be a
decrease in the proportion of purely clerical positions in the accounting area
in favor of more senior personnel with extra technical and management skills.
Also, because of the greater breadth of responsibility to be obtained in this
area, it will become more common for senior management personnel to come
out of this area.
