- LOOK FOR ANOMALIES —Sometimes, even the pennies can matter! Although this example deals with detecting fraud and not so much internal financial reporting, it illustrates that even pennies can mean a lot. Kern and Company had been hired by some municipalities to assess the fairness of sewer rates that Harrisburg City was charging the municipalities to use the Harrisburg sewer system. We were given copies of Harrisburg’s cost reports, which showed budget and actual costs “to the penny.” In every category of “general and administrative costs,” in every one of the six years statements that we were given, actual and budgeted costs were the same to the penny! I have never seen another instance of that in more than five decades of experience! Exploring my observation served to reveal an illegal movement of funds within the city over five years, amounting to more than $30 million! Ultimately, although in bankruptcy, the city was required to make substantial restitution.
- “WHAT’S NORMAL FOR YOUR TYPE OF BUSINESS?” — Quite often, business owners will ask us that question relative to their own business. And believe it or not, in terms of things like financial ratios, “reality checks” for the owner’s idea as to the value of their business, and profit margins, there are scads of sources to go to—and Kern and Company knows where to look. But such data is often misunderstood. Let me tell you a little story. I have had the good fortune of frequently being in Christiansted, capital of St. Croix. A few of the locals let me know me about a new restaurant with incredible food, so we went there for dinner. The food was great! Prices were high (like New York City prices), and we were the only customers in the place. The owner/chef stopped by our table and asked how we liked it. We told him the food was excellent and suggested he reduce portion sizes and lower prices a bit. He said that he couldn’t do that because his accountant told him that he needed to get a specific “price per plate” to do well in that industry. The fellow just couldn’t bring himself to understand the assumptions behind such “rules of thumb.” The point is this: What is normal may not apply to your situation.
- NOT ALL REPORTING NEEDS TO BE FINANCIAL TO BE VALUABLE — For a few years, I was the CFO of a large bedding manufacturer and sales business. I learned almost immediately that twin-sized bedding was far less profitable than double, queen, and king-sized bedding, because the differences in selling prices, which were set by the marketplace, were grossly different than the differences in per-unit manufacturing costs. So, if I saw a massive influx of orders for twin-sized bedding (for the likes of hotels, hospitals, and dormitories), I knew lower corporate gross profits were on their way.
- INCOME STATEMENTS FOR EACH LOCATION — If you are operating two or more locations, each with a unique manager, performance evaluation is often a challenge. Evaluate your branch and manager’s performance by segregating fixed and variable costs based on traceability and make a fair allocation of expenses that are not uniquely traceable.
- GRANDPA WAS STEPPING ASIDE — Some years ago, a fellow in his late 20’s approached me with significant concerns. He worked in a business owned and operated by his grandfather. The grandfather was retiring and giving the enterprise to him. The firm did very ornate wood carvings for entities like houses of worship and museums and had a long history of good profits. The grandfather had always done the estimating but had not been passed on this information to the grandson! The grandson had heard good things about Kern and Company and came to us for help. We were able to work with his grandfather and come up with an estimation system that institutionalized the grandfather’s knowledge and skills.
