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THE CONTROLLER’S
FUNCTION
THE WORK OF THE MANAGERIAL
ACCOUNTANT
THIRD EDITION

JANICE M. ROEHL-ANDERSON
STEVEN M. BRAGG

JOHN WILEY & SONS, INC.

THE CONTROLLER’S
FUNCTION
THE WORK OF THE MANAGERIAL
ACCOUNTANT
THE CONTROLLER’S
FUNCTION
THE WORK OF THE MANAGERIAL
ACCOUNTANT
THIRD EDITION

JANICE M. ROEHL-ANDERSON
STEVEN M. BRAGG

JOHN WILEY & SONS, INC.

This book is printed on acid-free paper.

Copyright © 2005 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise,
except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without
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priate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA
01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com. Requests to the
publisher for permission should be addressed to the Permissions Department, John Wiley & Sons,
Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best
efforts in preparing this book, they make no representations or warranties with respect to the accu-
racy or completeness of the contents of this book and specifically disclaim any implied warranties
of merchantability or fitness for a particular purpose. No warranty may be created or extended by
sales representatives or written sales materials. The advice and strategies contained herein may not
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ing but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services, or technical support, please contact our
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Library of Congress Cataloging-in-Publication Data

ISBN 0-471-68330-2

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1
 CONTENTS

Acknowledgments xi
About the Authors xiii
Preface xv
1 The Controller’s Job 1
History of the Controller’s Function 1
Main Job Functions 2
Job Description 3
Job Qualifications 6
Organizational Structure of the Accounting Department 7
Ethics 10
2 Internal Control 12
Basic Elements 12
Controls to Use in Your Business 19
Elements of Internal Accounting Control 54
Levels of Controls 55
Responsibility for Proper Internal Controls 56
Fraud 57
Auditing for Fraud 61
3 Planning and the Strategic Plan 63
Strategic Plan Overview 63
System of Plans 65
Planning Cycle 66
Planning Roles 69
Planning Timing and the Planning Period 70
Business Mission 71
Developing Long-Range Objectives 73
Developing Long-Range Strategies 75

v
vi Contents

4 Long-Range Financial Plan 79

Layout and Purpose 79
Trends of Revenues and Profits 80
Capital Investments 81
Cash Flows and Financing Requirements 83
Risk Analysis 85
Breakdown by Business Unit/Product Line/Geography 86
Financial Position 87
5 Annual Plan 93
System of Plans 93
Annual Planning Cycle 104
Role of the Controller 105
Sales Planning: The Base of All Business Plans 106
Steps in Developing the Near-Term Sales Plan 106
Methods for Determining the Sales Forecast 108
Useful Sources for Forecasting Information 112
Break-Even Chart 112
Changes in the Sales Mixture 115
Changes in the Sales Price 117
Changes in the Cost 117
6 Sales 119
Role of the Controller 119
Sales Analysis 121
Sales Standards 124
Sales Reports 127
Product Pricing 129
7 Distribution Expenses 135
Role of the Sales Manager 136
Analyzing Distribution Costs 136
Analyzing by Application 138
Setting the Distribution Budget 144
8 Direct Materials and Labor 151
Objectives 151
Role of the Controller 152
Types of Cost Systems 155
Measuring Direct Material Costs 156
Controlling Direct Material Costs 157
Controlling Direct Material Quantities 159
Measuring Direct Labor Costs 162
 Contents vii

Controlling Direct Labor Costs 162

Target Costing 169
9 Overhead 171
Need for Overhead Controls 172
Responsibilities of the Controller 172
Account Classifications 174
Fixed and Variable Costs 176
Cost Allocation 181
Controlling Overhead 190
Production Reports 193
10 General and Administrative Expenses 196
Functions Involved 196
Accounting for and Allocating Administrative Expenses 197
“Unique” Expenses 199
Controlling Costs 201
11 Cash and Investments 204
Objectives of Cash Management 204
Role of the Controller 205
Cash Collections 205
Cash Disbursements 206
Investment of Short-Term Funds 207
Accounting for Records of Investment 210
Cash and Investment Controls 213
12 Receivables 219
Functions of the Credit Department 219
Shortening the Receivables Cycle 222
Reserve for Doubtful Accounts 224
Receivables Fraud and Control 225
13 Inventory 227
Inventory Management Systems 227
Inventory Tracking 233
Physical Inventory Procedure 239
Inventory Valuation 242
Inventory Fraud and Controls 246
14 Property, Plant, and Equipment 249
Role of the Controller 250
Capital Budgeting 251
Postproject Appraisals 261
Other Aspects of Fixed Assets 262
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viii Contents

15 Liabilities 266
Objectives 266
Controls 267
Credit Agreement Provisions 268
Debt Capacity 269
Bond Ratings 271
Leverage 272

16 Equity 274
Role of the Controller 274
Cost of Capital 275
Dividend Policy 283
Long-Term Equity Planning 284
Repurchasing Common Shares 289
Capital Stock Records 290

17 Operational Accounting 292

Create Departmental Job Descriptions 292
Create a Departmental Training Program 294
Clear Out Excess Documentation 296
Document All Major Processes 297
Schedule the Department 297
Correct the Underlying Causes of Errors 299
Use of Best Practices 301
Outsourcing Selected Accounting Functions 304

18 Closing Procedures 309

Selecting the Fiscal Year 309
Selecting Interim Reporting Periods 310
Quick Close 311

19 Performance Measurements and Trends 319

Performance Measurements 320
Trends 335
Interrelationship of Ratios 336
Just-in-Time Ratios 337

20 Financial Analysis 340

Analyzing Financial Statements 340
Analyzing Working Capital 345
Analyzing Capital Investments 351
Analyzing Capacity Utilization 353
Analyzing Financing Options 356
 Contents ix

Creating Forecasts 358

Improving Shareholder Value 360
21 Taxes 366
Tax Strategy 367
Tax Organization 368
Role of the Tax Manager 370
Tax Records 371
Tax versus Book Accounting 374
Proper Classification of Accounts 375
22 Selecting a Financial Information System 376
Reasons to Purchase Software 376
Defining Systems Requirements 377
Existing System Documentation 380
Joint Sessions 381
Preparing the Request for Proposal 383
Distribution of the Request for Proposal 388
Review of the Vendor’s Completed Proposal 389
Reference Calls 392
Demonstration 394
Site Visits 394
Cost of the System 395
Final Selection 395
Contract Negotiations 396
Postimplementation Review 397

23 Project Risk Management 399

Project Risk Categories 400
Project Risk Management Approach 402

24 Implementing a Successful CRM Solution 410

Define a Business Case to Drive Shareholder Value 411
Clearly Communicate the Change Imperative 412
Building a Winning Team 413
Prepare for the Worst 415
25 Organizations Large and Small
Embrace Shared Services 416
Executive Summary 417
About the Survey 418
Business Case 418
Implementation 421
x Contents

Operations 423
Customer Relations 424
Next Steps 426
26 Information Technology Offshore and Outsourcing 428
What Offshoring Is 428
Providers’ Approach to Outsourcing and Offshoring 432
Variants: Build, Buy, Rent 432
Popular Start-Up Options 433
How Offshoring Is Different from Engaging
a Local Service Provider 434
Ensuring That Risks and Rewards Are Balanced 435
Deciding if Offshoring Is Good for a Company 436
27 Change Management 437
Implementation History 438
Competing Projects 440
Degree of Disruption 442
Cost of Failure 442
Risks 443
App A New Controller Checklist 450
Index 455
 ACKNOWLEDGMENTS

With the rapidly changing business environment, it is essential that the

material contained in this revision be accurate, up-to-date, and relevant.
Accordingly, in addition to the chapters written or revised by the coauthors,
these contributing authors, listed alphabetically, wrote or revised the chap-
ters indicated:
Kevin Church, Senior Manager
Deloitte Consulting, San Francisco, California
Chapter 25, “Organizations Large and Small Embrace Shared Services”
Pak Fong, Senior Manager
Deloitte Consulting, San Francisco, California
Chapter 24, “Implementing a Successful CRM Solution”
Susan Hogan, Principal
Deloitte Consulting, Atlanta, Georgia
Chapter 25, “Organizations Large and Small Embrace Shared Services”
Sara J. Moulton-Reger, e-Business Strategy Consultant
IBM Global Services, Denver, Colorado
Chapter 23, “Project Risk Management”
Chapter 27, “Change Management”
Kalyana Sundaram, Senior Manager
Deloitte Consulting LLP
Chapter 26, “Information Technology Offshore and Outsourcing”
Jan Roehl-Anderson would like to thank God for His unending blessings.
Additionally, thanks should be given to Fritz Anderson for his patience and
moral support.
A special note of thanks to our editor, Sheck Cho, not only for suggesting
the original edition, but also for suggesting a revised and enlarged version.
xi
 ABOUT THE AUTHORS

Janice M. Roehl-Anderson, MBA, is a partner with Deloitte Consulting

LLP, with over 20 years of consulting experience. She specializes in infor-
mation systems security; financial and cost accounting system analysis,
design, selection, and implementation; and long-range information system
planning. She has also worked for Ernst & Young and has successfully
completed the CPA exam.
Steven M. Bragg, CPA, CMA, CIA, CPIM, has been the chief financial
officer or controller of four companies, as well as a consulting manager at
Ernst & Young and auditor at Deloitte & Touche. He received a master’s
degree in Finance from Bentley College, an MBA from Babson College,
and a bachelor’s degree in Economics from the University of Maine. He
has been the two-time president of the 10,000-member Colorado Mountain
Club and is an avid alpine skier, mountain biker, and rescue diver. He has
also written Just-in-Time Accounting, Advanced Accounting Systems, Out-
sourcing, Accounting Best Practices, Cost Accounting, Financial Analysis,
Inventory Best Practices, Payroll Accounting, and Managing Explosive
Corporate Growth, and has coauthored Controllership: The Work of the
Managerial Accountant. Mr. Bragg resides in Centennial, Colorado.

xiii
 PREFACE

This revised edition of The Controller’s Function is a complete operations

reference manual for the corporate controller. Within these pages the reader
will find a comprehensive discussion of how to manage all major aspects of
the controller’s job, including strategic and annual planning, financial
reporting, and managing all aspects of the accounting department, as well
as peripheral issues such as the fast close, electronic data interchange, best
practices, a wide array of controls to help deal with the Sarbanes-Oxley
Act, software selection and implementation, and financial analysis—and
much, much more.
This book was written in response to the growing realization that the
controller is no longer being called on just to process accounting transac-
tions and issue financial statements, tasks requiring detailed technical
knowledge but no considerable management or analysis skill. Instead, the
modern controller must exhibit additional mastery of a multitude of man-
agement skills, so that the accounting department runs in an efficient and
effective manner, offers a detailed analysis of financial statement results,
recommends improvements, and monitors the activities of other depart-
ments and perhaps even manages the computer systems in a smaller organi-
zation. This book gives considerable attention to the most recent advances
in all these new areas of responsibility, so that the controller will be fully
capable of installing and using them to improve his or her company’s level
of competitive advantage. Included in our coverage of these advances are
the use of electronic spreadsheets for financial analysis, shared services
computing applications, target costing, disaster recovery planning, activity-
based costing, outsourcing, information systems security, and software
package integration.
In addition to these more advanced categories, the book also includes
such bread-and-butter topics as cash management, internal control systems
and fraud prevention, accounts receivable collections, inventory valuation,

xv
xvi Preface

budgeting, taxes, insurance, and capital budgeting. Because basic and

advanced accounting management topics are combined in one volume, the
reader has access to the complete reference for mastering the controller’s
function.

Centennial, Colorado
November 2004
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