These can impact the accounting treatment for revenue recognition purposes and there should be internal controls in place to ensure the details on concessions are tracked and recorded. If those controls are weak or not present, then that is a red flag requiring further analysis and review. Management overriding internal controls over financial reporting over bad debt reserves - many companies use a formula-driven approach to the calculation of bad debt reserves. This is a function of the aging of the accounts receivable. Often, a progressive percentage reserve is applied to the total accounts receivable amount aged over the usual collection terms, and this formula will be documented in the accounting policies and procedures manual or monthly closing binders. The reserve may be calculated and recorded on an automated basis, or a calculation performed and recorded by a member of the accounting team. When you see additional entries recorded to reduce this calculated reserve, or it never being recorded at the calculated amount, then that can be a red flag that can suggest improper management influence over the reported results. Disconnect between the reported results and actual experience – In this example, you can have a division or a subsidiary and the recent financial reports show that it is performing to plan and generating profits. When you talk to the team at the entity, you learn that cash flow is very tight, and they need frequent help from head office to meet expenses. This is a red flag that merits further review. Sometimes the explanation may be that major customers are late paying their invoices or there are other legitimate reasons for delays in payment (e.g., waiting for an engineering certificate of completion). An analysis should be performed to ensure that the reported results are accurate. Overly complex and opaque monthly closing process with insufficient division of duties – This is a red flag that can often be present in smaller entities. It can also be present when there is only one qualified accounting person who is assisted by a team of clerks who do not 32 LAWYER MONTHLY NOVEMBER 2023
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