Internal Control Tip: Is Your Room Clean?

Messy Room

A cluttered balance sheet, like a dirty room, can bury issues in your financial wellbeing by housing erroneous or fraudulent entries similar to, dirty clothes piled on the floor.

Balance sheets can be like bedrooms, no one but you ever sees them so they are often cluttered and you can lose things in there for years. So, we have to take a hard look at our balance sheets (especially our general fund) and ask ourselves how close we would be to starring in the next episode of American Hoarders. A cluttered balance sheet, like a dirty room, can bury issues in your financial wellbeing by housing erroneous or fraudulent entries similar to, dirty clothes piled on the floor.

Now, your mother may not be your immediate supervisor in the Business office, so in most cases you probably don’t get asked if your room (balance sheet) is clean. Let me give you three directives my lovely wife and mother of our five daughters would give:

  • Make your bed (miscellaneous debits)
  • Take out the trash (miscellaneous credits) or
  • Return your sisters’ clothes (cleared interfund accounts)

Make your bed – This loving advice is generally followed by the angsty expression, “I’m just going to mess it back up!” but there might be things in your bed that you need like a phone, homework, your keys, or items you need to move like stuffed animals, socks or Twinkie wrappers hiding in the folds of your comforter. Similarly, take a look at those oddball receivables, prepaids, and other debits. Can you turn these into cash or are they just expenditures waiting to happen? Did your estimation of collectability change as time passed? Does it belong on your balance sheet or is it time to move?

Take out the trash – Check under your bed. On the credit side of the balance sheet, most of the entries might come from automated entries possibly from the payroll or accounts payable module. Here is something to remember about such entries: even though you didn’t put them there, you still need to pick them up. It’s your room. Look for automated entries and subsequent payments to zero out, even if for only a few minutes. If a liability fed by automated entries is growing, this might be an indication something is out of sorts, either on the initiation end of the entry or the clearing end. Over time, these issues can lead to financial statements being materially misstated. Be sure to check under the bed, like old boy band posters and homework assignments from third grade, you might end up with one and done entries on your balance sheet that linger for years. These entries generally arise from year end accruals that have not been reversed. If these entries are made after year end, you might not even see their effect on the operating statement until the next yearend.

Return your sisters’ clothes – It does not matter if she loaned them to you or you just borrowed them on the fly, return them as soon as possible. There is nothing that will throw off a relationship between sisters, and funds, like not returning things. Look around your whole house (all your funds) and determine who is borrowing what. This could mean interfund receivables/payables or for simplicity, negative cash accounts. When you walk into a situation where the general fund has recorded $60 million in consolidated cash and another fund has recorded a negative $58 million in consolidated cash, you would be correct to assume, you actually only have $2 million in consolidated cash and you might want to take action. Periodically evaluate the collectability of the interfund receivables or negative consolidated cash. It might be time to admit you gave your sister that top.

My last piece of advice would be to listen to your mother and keep your room clean. Oh, and give your mother a call, she would love to hear from you.

The author Christopher Breaux and his wife Lillie are recently empty nesters.

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