There’s more to validate than the balance sheet

Many companies regularly validate the balance sheet, so that the bottom line of the Income Statement is correct. Many companies don’t realize that it’s also important to validate the validating reports.

As an example, one AccountMate client who had been dutifully validating their AR asset account against the Customer AR Aging Report every month, just happened to take a closer look at the data one day. And they realized they had a list of open customer invoices that were so past due, that some went back more than seven years! Needless to say, the likelihood of collecting on invoices that old isn’t good. They were faced with writing off approximately 25% of their current outstanding customer invoices, and senior management was understandably upset at the prospect—but what were the realistic choices at that point?

This was an extreme case. But careful monitoring of the AR Aging Report would have allowed bad debt to be written off in small pieces over numerous years, so as not to impact the bottom line by such a large amount all at once, and undoubtedly would have resulted in collection efforts being added in a timely manner that could have yielded results.

Here’s a list of the reports to be sanity-checked on a pretty regular basisi.e., REVIEWED IN DETAIL for completeness, status, and accuracy. Those indicated with an asterisk go with validating the Balance Sheet at least monthly; the others at least quarterly:

  1. AP > Past-Due Aging Report*: Validate Payables Liability account
  2. AP > Prepayment Invoice Report*: Validate Prepayment Asset account
  3. AR > Aging Report*: Validate Receivables Asset account
  4. AR > Open Credit Report*: Add to Aging Report to validate Receivables Asset or separate Liability account
  5. AR > Open Credit Adjustment Report: Review the amount of discounts and write-offs taken during the cash receipt process
  6. AR > Sales Tax Amount Report*: Validate Sales Tax Liability account
  7. BR > Bank Reconciliation Report*: Validate Cash Asset account
  8. IC  > Warehouse Quantity Listing*: Validate Inventory On-Hand Asset account(s)
  9. IC > Inventory In-Transit Report*: Validate Inventory In-Transit Asset account(s)
  10. MI > Backorder Report: Review open Work Orders
  11. MI > Work-In-Process Report*: Validate WIP Asset account(s)
  12. PO > Purchase Order Backorder Report: Review open orders, best sorted by Request Date
  13. PO > PO Line Items for AP Matching Report*: Validate Accrued Received Goods Liability account
  14. PR > Employee Paid Leave Listing*: Validate Accrued Employee Benefit Time Liability account(s)
  15. PR > QTD Tax Withholding Report*: Validate Accrued Tax Liability account(s)
  16. RA > RMA Status Report: Review goods not yet received, and not yet shipped, and not yet completed
  17. SO > Advanced Billing Summary Report*: Validate Deferred Revenue Liability Account
  18. SO > Credit Hold Sales Order Report: Review Sales Orders on credit hold
  19. SO > Drop Ship Order Status Report*: Review orders not yet shipped
  20. SO > Open Sales Order Report: Review open Sales Orders, best sorted by Request Date; also review Sales Quotes
  21. SO > Un-Invoiced Shipment Cost Report*: Validate Un-Invoiced Inventory Asset account

This is a lengthy list, but the complete list won’t apply to most businesses. And you can schedule recurring monthly or quarterly reminders or “meetings” in your calendar to spread the work out while ensuring that nothing gets missed—and that your company takes action on anything new that requires attention, discussion, or followup. It’s unlikely that one person needs to do all of this; for example the open RMAs would naturally be best understood and validated by a different person than the person who understands and validates the sales tax liability account.

The bottom line: It really is critical to validate things on a regular basis—before they get away from you!