Moderated by Kate, Financial Technology Consultant at Hyperbots
Kate: Hi, Jon, thank you so much for joining us today. So let’s just dive right into the questions. So coming to the 1st question, why are segments like company code cost center code project code and important in a chart?
Jon Naseath: Absolutely It really comes down to if you want to be able to see and if you’re thinking about your general ledger, then you have the. You can look at things as to how the company looks. How does this entity look? What’s this? Does cost center profitability as an example? And then you mentioned Project Code and Gl codes and others. I would. I would argue that company code. Certainly, you need to be able to see what is the full P and L. View, or at least what is the financials for that company. Also for the cost center. You know what’s the cost and expenses specifically to that department, or mark such as marketing, or it to help drive performance project code. It depends. It has, I would argue, it should be a large project, like a major initiative that you’re doing or a major development effort where you do need to have that project full P. And L. Because it’s a lot of work to maintain and to integrate that into your system? And then just the gl is what ties all those together across assets and liabilities and enables that full view across the different, all the business units that you’re talking about.
Kate: Okay, that’s understandable. Moving on to the second question, what are some best practices for naming conventions for these segments? And why standardization? Important.
Jon Naseath: Yeah, there, there’s just I’ll call them standard ways, like, as you said, default ways of being consistent is the main thing and making it. So that when somebody’s looking at these codes, they understand and kind of interpret what you’re talking about. So with company code as an example.Understanding as part of that you think about what is the syntax within the code. So it might be that there’s a country at the beginning like us, dot 0 0 1 could be. The country could be a company code for a US Entity. A cost center could be, you know you might put some letters that represent an example like Mkt. 0 0, 1 could be marketing. What do you want it to be able to be something, so that a human can interpret what these codes are doing in a sequential order of, you know, revenue and different departments can also be helpful? And then, when you’re doing a project code as an example, something that it’s again, I would suggest a major initiative you’re doing. But you want to be clear that these are the costs that relate to it for a given year. You might say this is Project Code Xyz, or whatever. But then put 24 at the end, like the year. Something represents what year it’s for so that you’re looking at your costs for a given period. It’s very clear how to distinguish. Even if it’s a major initiative program. You want to know that these are the costs for one year versus the next year in that example. I’ve used that before. But just consistency is the key thing and you know it should be easy enough to interpret how those codes are gonna map to. If you think about your management reporting aspects of summary of management reporting, and what periods they go to, and things like that.
Kate: Okay, yeah, I agree with you. So moving on, what are some common mistakes accountants make with these segments, and how can they be avoided?
Jon Naseath: Okay one example is they people are putting the wrong transaction to the wrong code. So misclassification of codes.And then if you do that. You know the thing that accountants hate is having to do reclassifications, because, you know, if you get an auditor coming in and say, Oh, that was done wrong, and then you have to later reclassify something. Whether that was because it was a mistake or because the business changed, and maybe the timing of how things were coded wasn’t accurate in time but having to do reclassifications is always painful and then redoing, and oftentimes if you’re in a big public company, you’ve reported numbers. You just don’t want to do that. It can create big problems for investors with redundant codes. So seeing that there’s actually something you can have. I like to call it blowing out your chart of accounts where you just have too many codes and reality is the accountant who’s trying to map things to the code. There’s no difference between A B or C from their point of view, or maybe the transaction would apply to all of them, so they’ll usually just pick one and then you end up having 2 other codes in that example that just aren’t used. So that’s if you’ve blown out your P. And L your chart accounts too much, then it’s kind of a waste of time. Also inconsistent coding. So if you have, say that I was describing some of the syntax before. if you use 3 letters, and then a number, or if you use 3 numbers a dash, then a number. You know, you just want to be consistent. So it’s clean and that’s hard over time. Things change. But doing the classic example in this is it? I’ve seen companies. I’ve been involved in companies where previously they had put all of their products into the chart of accounts into the GL and that might be good intent at the beginning when you only have a few products. But then they have, like dozens and dozens of products. Every time the product wants to reshuffle how they’re presenting their products you would need to update your chart of accounts to map to that. So I’ve seen problems from that before because you don’t remove the historical accounts. You just add new ones to it, if it’s problematic.
Kate: Couldn’t agree more, moving forward. How can organizations maintain the integrity of these segments in their ERP systems?
Jon Naseath: Yeah, it really comes down to data governance so you need to have consistency and integrity of the chart of account segments. I think one of the best ways of doing that is, having an owner, you know, having role-based access controls, controlling, who has authority to update that oftentimes that comes down to the job of the controller and that’s kind of one of the main jobs. The controller by definition is to control which accounts are going to be called what things, and try to maintain some consistency even though the business is changing and enabled. So you can do historical reporting on the new views but just define the standardized naming conventions doing regular audits and making sure that things are consistently showing up. I mentioned in a previous discussion about the budget to actual reconciliation. So if you’re doing a budget or a forecast, and how those map to your chart of accounts that will flag if your forecast, where you’re gonna look at the business is consistent with your I’ll call it historical way of looking at the business in your chart of accounts. So just doing those budget versus actual reconciliations is helpful and then automating validation rules. So that as you’re entering entries into the system they’re coded correctly and there are different reconciliations, and controls you can put in place in most ERPs.
Kate: That was really insightful. I totally agree with you. Moving forward with the next question, what role does technology play in managing these segments effectively?
Jon Naseath: Yeah, I describe the main role as helping flag or raise inconsistencies for you to be able to see them, and either preventative controls or detective controls right? It’s gonna prevent you from coding it incorrectly upfront or if you’re on the FP and a side, and you’re seeing inconsistencies, it can flag things for you that you can then work with the accountant to clean up so automated detection. It may help generate the codes automatically based on whatever the transaction was, it can suggest different codes for you, for the Gl or the call center. you know, just there’s a lot of times of manual errors that can happen, and it can help prevent those as you’re coding things. Data integrity. Again, the ERP system looks for duplicates, looking for missing values, or something that was hard coded wrong, and then dashboards again. It’s always funny to me, cause the situation is when you have, like a senior executive that really wants to see the real-time accounting dashboards of what’s happening but with accounting you’re always in the process of trying to catch up and you know, book the transactions at one of the companies I’m working with right now. The accountant got pulled into something else, and he’s 3 months behind in booking the accounting. It’s a smaller company, but the executive wants to see his dashboards, and the numbers are just wildly off, so if management’s making decisions based on these historical numbers that are wildly off that’s problematic. So technology can help keep you consistent and help book things in real-time as they’re happening. So that you’re just kind of managing by exception as opposed to having to book everything manually.
Kate: Understood. So we have almost reached the end of our interview. Can you provide examples of how errors in segment coding can impact financial reporting?
Jon Naseath: You know well, not only I’ll call it not only impact the financial reporting, but impact your whole business like if you’re in a public company, and you’re coding something to the wrong place. Then you report those numbers. Investors make bad decisions, and usually, then lawsuits can happen because they’re like, oh, that was intentionally misstated and we made investment decisions based on whatever. So I remember just kind of this tight schedule of closing the books, and then rushing to get all the books closed, and then at the month end, accounting financial preparation done. So you can produce investor analyst reports for a public company and there was this army of like 30 or 40 investor analysts just waiting to dive in and find any anomalies in what you just reported and I remember just once or twice. I don’t remember if it actually happened, but I remember the fear was always like, if we miss something, then they’re gonna call you on it because it’s wrong. You have to say, oh, that was an error, that’s just bad for the team. So we avoided making errors but you end up with misstated financial statements. You have compliance issues that auditors would find and an inaccurate profitability analysis, like, what is the profit? What is the forecast? What’s your guidance going to be for the next quarter that you’re gonna give? All those are off? If your core things have been coded incorrectly.
Kate: So the last question for today, what steps would you recommend to an organization looking to improve its COA segment management?
Jon Naseath: Yeah, the 1st thing that I’d call out is verifying the historical accuracy and knowing what numbers you can rely on, I’ve been in a situation where a company hadn’t had proper controls around their accounting historically when I was brought in, and we tried, and previous to my joining the owners had made different business decisions based on well, they frankly they bought the company that I was then brought in to help them manage, based on these inaccurate accounting numbers. And so then, when I came in and figured out what actually was happening, and why they didn’t have enough cash at the end of each month. It was because of these basic accounting errors which I’ll say could have been avoided. So you know, just implementing standard close process standard controls in place naming conventions around what codes need to be what? And making sure that they’re coded correctly and used consistently. Leveraging technology, I’d call out specifically AI nowadays a lot of the ERP systems, you know, when I started my career, different ERP systems were different Oracle sap like QuickBooks.They all kind of competed on feature functionality but nowadays they’re also similar in their core functionality. So there are other tools that can help leverage. What’s there get your clothes faster, better, cheaper, and less costly. Regular training, making sure that the team, and specifically, I’ll call it business rules, make sure that your different team has the same business rules that they’re following when they’re coding things. Usually, I’ll have like. if there’s an accounts payable clerk, there’s a 1 page, something that they use as guidance to know how to code, what, and where. As an example and then putting in place the appropriate review mechanisms. As I mentioned before. if you’re in a big public company and your numbers are going to. Investors are making investor decisions in real-time. You have a series of reviews and a series of controls in place literally, like number by number, checking and automated, checking, manual checking, and having a binder for each close to show what you checked and that you signed off on everything. Just those are standard things when you’re doing accounting closes for big public companies. But I’d argue what I spent a lot of my subsequent career doing is implementing those similar sorts of controls for smaller companies that aren’t big in public because someday they might be, and regardless of whether you’re public or you have investors looking at your numbers every day you, should you? You want to have clean numbers so that your management can make good decisions and grow the business. So consistency completeness, accuracy, all your classic accounting things that auditors will look for later. Make sure those controls are in place. Don’t rely on just your auditors telling you when you should fix things, get them clean so that your management can make good decisions from the start.
Kate: So much, Jon. That was a really insightful conversation. Thank you so much for your insights. It was really nice to have you today with us here and thanks a lot. Have a nice day.
Jon Naseath: You, too, have a great day. Thanks.
