Balance sheets and sub-ledgers get out of whack sometimes. And although I’ve written about how to keep your ERP system on track, alas and alack, not everyone in the world reads my blog.
And besides, sometimes the ERP system was coming off the rails well before you arrived on the scene. So what to do?
Certainly, this has happened to me multiple times in my career. Twenty years ago, I spent a whole day proving to a client’s controller that their GL problem started well before my AP system came into play. (We’re talking only $2M on a $10M number, but who’s counting.) When I finally proved my point, the controller shrugged, “Yeah, we’ve had a problem for a while, but I thought you might find something.” ARGH!
How Will You Know When a Number Makes Sense?
Even today, with pivot tables and million row Excel sheets, people still follow my 20-year old example and dive into the numbers to look for the proverbial needle in the haystack. And you may get lucky. But more often, you’ll waste a lot of time.
So today, I follow this basic rule: Before diving into a detailed analysis of where something has gone wrong, I ask myself how I can find an approximate number that will keep me in the ballpark and narrow my search.
A Case of Deferred Revenue
This happened again recently. In this case, it was a problem with deferred revenue. For reasons I don’t understand, no one in this company had reconciled deferred revenue against anything before. And the previous auditor was exclusively focused on the income statement (again, I don’t understand why, but that’s beside the point). And because the company’s main revenue generating activities were seasonal (a summer camp), deferred revenue was huge in the winter and spring months.
Unfortunately, given the state of the company’s systems, tracing every transaction on a global level was next to impossible. Fortunately, I didn’t need to. Instead, I asked, “How will we know when a number makes sense?”
And I found it: The system could give us a list of everyone enrolled in summer camp. And that enrollment number (less any outstanding camp receivables) represented deferred revenue before summer camp began. It also provided a list of things the auditor could test. We had solved the problem without having to trace the exact flow of every transaction.
So remember, when the system can’t provide you with the details you want (and even when it can), start by asking what’s reasonable. Then look for things that back up that reasonable assertion.