CHAPTER 6: This is a very common objective if there are perceived

problems in this area is:

INTERNAL AUDIT FUNCTION
 That the company is following operating policies and
 External Auditors
procedures.
- Review disputes between the external auditors
and management. Prevalence of computer systems and the degree to which
- Review the use of external auditors for other they are now integrated into a company’s most crucial
services. operations.

 That computer systems are accurately processing

 Internal Audits
data.
- final approval over the person selected to fill
this position Ethical standards
- Review the replacement of the internal audit
director.  That the company is following an approved set of
- Review the internal audit staff’s objectives, work ethical guidelines
plans, training, and reports.
Annual internal audit plan for reviewing the previous
- Review the cooperation received by the internal
objectives.
auditors
- Review disaster recovery plans.  That it creates an annual audit plan that addresses
all of these objectives.
 Financial Systems
- Investigate fraud and other forms of financial The final objective relates to the output from the work of the
misconduct internal audit department
- Review corporate policies for compliance with  That it provides written reports of its findings to
laws and ethics those levels of management needing the
- Verify that financial reports address all information in order to correct faulty systems
information requirements of lenders
- Review all reports to shareholders, including Internal Audit Activities
special reports, for consistency
The eight internal audit objectives followed by a variety of
- of information
related audit activities.
The audit committee is empowered to investigate fraud and
1. Objective: That control systems will adequately safeguard
other forms of financial misconduct,
company assets
Rather than review the results of such an investigation by
 Cash
someone else.
 Fixed assets
 Inventory
 Supplies
Internal Audit Objectives
2. Objective: That company financial statements follow GAAP
-framework for constructing audit programs and are accurate
-determining the most appropriate skill set for the staff, plus  Cost of goods sold
-the number of people needed to staff the department  Expenses
 Revenue
Useful objectives when the audit staff is so small that there is
no room to pursue a wider-ranging set of objectives are: 3. Objective: That the company is following operating policies
and procedures
 That control systems will adequately safeguard
company assets  Labor, inventory, bank recon, FS, machine run,
product quality level, scraps, shipments, accuracy
 That company financial statements follow generally and timeliness.
accepted accounting principles (GAAP) and are
accurate.
4. Objective: That computer systems are accurately
processing data

 Data is accurate, correctly calculating, new systems

for proper processing

5. Objective: That the company is following an approved set

of ethical guidelines

 reported ethics cases

 number of ethics training hours per year
 teach ethics to employees that matches and
supports the principles described in the company’s
official ethics policy.

6. Objective: That the department creates an annual audit

plan that addresses all of these objectives

 consulted regarding the contents

 reviews for all of the previous audit objectives
 key control problems pointed out by the external
auditors

7. Objective: That the department provides written reports of

its findings to those levels of management needing the
information in order to correct faulty systems

 Verify that feedback

 Verify the degree to which recommendations have
been implemented
 CHAPTER 7:
Recruiting, Training, and Supervision
Recruiting Sources
3 key factors involved in selecting a recruiting source
1. Recruiting cost.
2. Recruiting quality.
3. Recruiting time.
The recruiting sources are:
 Audit and consulting firms
- This approach is very inexpensive
- this is an excellent way to bring in top-notch
personnel quickly and at low cost.
 Campus recruiting.
- lower-level positions
- It is also expensive
 Employees.
- best sources of recruits is current employees
- incentive turns the entire employee group into
an enthusiastic horde of recruiters
 Former employees.
- This approach is not only quick and inexpensive,
but best of all, it results in highly qualified
candidates who require minimal interviewing
before being hired back.
 Internet Postings.
- Quality of recruit tends to be low
 Newspaper advertisements.
- the low quality is that only those people who
are actively looking for work are reviewing the
advertisements; this ignores the most qualified
people, who are currently working elsewhere
 Professional publications
- advantage of this approach is that only a
selected group
 Search firms.
- most expensive recruiting approach
- search firms conduct their own screening of
candidates, which results in a higher quality of
applicant
Factors to Consider when Recruiting
 Integrity
- accounting employees must care about their
reputation for honesty and objectivity
 Process knowledge.
- search firms conduct their own screening of
candidates, which results in a higher quality of
applicant
 Communication skills.
- actively participate in meetings with other
employees, clearly summarize and present
information, and create understandable written
reports
 Drive.
- complete work in a timely manner and take the
initiative in undertaking new projects.
 Technical capability.
- Accounting degree. Possessing such a degree
from an accredited university should form the
basis of a minimal technical qualification.
 Teamwork skills.
- able to function with the rest of the group
 Turnover likelihood.
- high probability of staying with the company
Factors to Consider When Promoting
 Sideways
- Through the hierarchy of the accounting
department
- is intended to expand a person’s skill base.
- to add to the experience of the staff in other
areas
- Generally, it reduces turnover, because the
controller is giving all employees a chance to
acquire new skills
(reverse can also happen if a staff person does
not want to shift to a new skill area, may even
quit)
 Vertical Variety
- Less common type
- Someone is shifted upward in the corporate
hierarchy
 Importance of Reduced Turnover How to Motivate Employees

This section describes the impact of turnover and how to 3 types of motivation systems
prevent it from happening.
1.) long-range career plan
By keeping the staff turnover rate as low as possible, a - based on the career plan.
controller can avoid many problems. - Discuss career options

These problems are:

 Increased costs.
 Increased inefficiency.
 Increased time by the controller.
- In short, recruiting reduces the time available
for completing other aspects of the job.
 Loss of specialized knowledge.
 Risk of an inappropriate hire.
How is it possible to drive turnover down to such low levels
that a controller no longer has to deal with its effects?
The answer is: to meet the needs of employees
2.) annual performance goals (midrange motivational
system)
- pay raises or bonuses at the end of the year
- (For example, accounts receivable turnover of
8.0 can be awarded with a 2 percent raise)
3.) team-based contests or targets in the very short
term
- one that grabs and holds the attention of
the accounting staff every day. This system is
much more difficult to arrange
- (For example, a clean-desk week, the rewards
for reaching such goals should involve the
group, such as a free team lunch)

The ways to reduce turnover are:

 Clarify jobs and related procedures.

 Improve communications.
 Increase pay.
 Look for a history of job longevity.
 Meet special employee needs.
 Recognize employee efforts.
 Review employees frequently.

Importance of Developing Career Plans for Employees

This section describes how to lock in employees for long

period of time by assisting them in developing career plans.

Career planning reduces turnover while promoting

employees to the maximum level and allowing the controller
to plan for employee advancement in an orderly manner.

The most common certifications for an accounting person to

earn are:

 Certified Public Accountant (CPA).

 Certified Management Accountant (CMA).
 Certified Internal Auditor.
 Certified Production and Inventory Manager.
- No renewal

CHAPTER 8
Controller’s Role in Investor Relations
Objectives of the Investor Relations Function
Principal purpose of the IR function, regardless of who
performs it, is the enhancement of shareholder value
Some chief executive officers (CEOs) might still regard the IR
function as a simple financial reporting activity, with no intent
to affect the stock price
But many CFOs will bluntly state that the objective is to
maximize the market price so as to minimize the cost of
equity capital
Communication Vehicles for Investor Relations
Methods used to communicate investor-related messages:
 Annual report to shareholders
 Quarterly reports to shareholders (and the financial
community)
 Annual meeting with shareholders
 Reports to the Securities and Exchange Commission
(SEC):
- Annual Report Form 10-K
- Quarterly Report Form 10-Q
- Current Report Form 8-K
 Regular or special meetings with security analysts,
institutional investors, brokers, and large individual
investors—often arranged in cooperation with one
of the several associations or societies for analysts
 Institutional advertising in newspapers or
periodicals (financial or general interest)
 Dividend stuffers
 Corporate announcements of special interest to
investors or potential investors:
- New products or services
- Management changes
- Acquisitions and/or divestments
- Reorganization attempts, such as restructuring,
unfriendly takeovers
Investor Relations Message Recipients
IR function must service an unusually complex and diverse
audience. For example:
 Investors and potential stock investors (small)
 Large institutional stock investors and potential
investors
 Security analysts
 Credit-rating agencies
 Financial advisory services
 Brokerage firms
 Bond-rating agencies
 Bank loan officers
 Bondholders
 Financial press
 Portfolio managers
 Government agencies dealing with financial matters
(federal, state, and local)
 Employees
3 Broad Groups: (at which the IR activity is primarily and
continuously directed)
(1) security analysts
(2) stockbrokers,
(3) large institutional investors.
Information Needs of the Financial Analyst
Financial Analyst a.k.a the security analyst
- the analyst desires information so that he can
reasonably predict earnings
- most important source of information for the
security analyst: is management presentations
Presentation content to analysts for a well established,
reputable company:
1. To give a sense of an experienced, in-depth, and
well-qualified management.
- The CEO should be present and give the
principal talk—about prospects, style of
management, management development
programs, market position,
2. To provide an insight into the long-term prospects of
the entity, the following subjects might be covered
by a knowledgeable executive (CEO, executive
vicepresident, senior vice president of finance, or
controller):
- The system or method of strategic planning
- short-term or annual plan process
- Important research and development programs
underway
3. To provide a broad financial picture, including the
financial strength of the company, perhaps a slide
presentation (graphs and charts) could be given that
would identify
- Status of orders on hand
- Trend of sales, by product line
 - comparative ratios with industry or selected
competitors
4. The chief marketing executive probably should make
a presentation that would describe and illustrate
major new products, or major revenue procedures,
and the sales prospects for the next year or two
5. Other executives, as appropriate, might discuss any
timely topics, such as:
- Employee relations
- Cost reduction programs
- Process improvements, including use of computers
Information Needs of Other Groups
These other players have varying interests
 typical individual shareholder
- most concerned with the general progress of
the company
 a bank loan officer
- prospects of repaying the loan on time
- His relationship is more confidential than the
general public
 Bond-rating agencies
- may be exposed to past and prospective debt
service coverage and related matters
Providing Guidance
The most common type of guidance issued is:
 For either a range or specific point, and usually
includes all key factors that would be of interest to
an investor
(ex. We now expect 2008 sales to range between
$120 and $135 million, resulting in net profits of
between $14 and $17 million….)
 An alternative is to provide guidance using
percentages
(ex. Our projected revenue growth is 7 to 10
percent. Based on our estimated increase of 5
percent in cost of goods)
 If a company is not willing to provide this level of
guidance, then a lesser alternative is to discuss
anywhere from a one- to five-year projection
(ex. We expect continued revenue growth of 60 to
80 percent for the next three years)
 Mosaic Approach
- to release a broad range of nonmaterial
information to analysts. They can then use this
information to create their own models of a
company’s operations and likely operating
results
Forward-Looking Statements
Private Securities Litigation Reform Act (PSLRA) was that new
law
PSLRA is Section 102, “Safe Harbor for Forward- Looking
Statements.”
- provides companies with a safe harbor from
liability for forward-looking statements to the
extent that such statements are identified as
forward-looking statements, and are
accompanied by “meaningful cautionary
statements
A forward-looking statement is defined in the PSLRA as
follows:
 A statement containing a projection of revenues,
income (even loss), earnings per share, dividends
 “ “ of the plans or objectives of management for
future operations
 “ “ of future economic performance
 Any report issued by an outside reviewer retained by
an issuer
 A statement containing a projection or estimate of
such other items
Organization Structure for Investor Relations
IR program must permit the exercise of 2 skills by company
executives the ability to:
1. Communicate effectively
2. Ferret out and comprehend the financial significance
of operating trends and relationships
There must be a coordinated approach; the company must
speak with one voice
What organizational structure is desirable?
One answer is, “The one that is effective.”
Role of the Controller and Other Principals
What should be the role of the controller?
For the typical medium-sized to large company,
 - where the CEO is somewhat active in IR, (d) Direction company is headed
- where the CFO tends to spend some time with
(e) Any forthcoming major events that can be
IR activities
announced
A likely split of functions might be listed as:
2. Meet, on a one-to-one basis or with a few individuals
 CONTROLLER only, any major
3. As appropriate in IR meetings, refer financial
1. information resource or source for any financial questions to the vice president of finance or
data controller
2. As required, an interpreter of the financial data 4. Meet with other major players, as deemed proper:
3. Communicator of financial information to commercial bankers, investment bankers, rating
individuals and groups entitled to receive it agencies.
4. Prepares, or reviews for accuracy and 5. Ascertain that the messages in any important public
completeness, any financial commentary in such statements, are as she thinks they should be
financial documents 6. Address important company matters and the annual
5. A reviewer for content and accuracy of all news meeting of shareholders.
releases, special announcements, and publications of
the investor relations activity

*When the controller is de facto

- the CFO, he or she would exercise the duties listed

previously, plus those of the CFO enumerated next.

 CHIEF FINANCIAL OFFICER

1. Should be the principal communicator of financial

policy
2. Should be the principal spokesperson or negotiator,
subject to approval of the CEO and/or Board of
Directors, as may be applicable, in connection with
the actual and imminent raising of capital
3. Should review all major published financial
documents
4. If the IR department is a part of the financial
organization, should direct its activities, establish
appropriate disclosure policies

*If the IR activities are under the cognizance of the CEO or

the public relations officer, the CFO should make appropriate
recommendations on suggested improvements.

 CHIEF EXECUTIVE OFFICER

1. Preside over major meetings with security analysts,

large investors.
Present the background and related information on
such important matters as:

(a) Company mission, purpose, goals and objectives,

and so forth

(b) Competitive position of the company

(c) Major operating accomplishments in recent

periods