Skills to Develop
- Describe the functions of key finance and accounting personnel.
Question: From the previous discussion, we know that planning and control functions are often designed to evaluate the performance of employees and departments of an organization. This often includes employees overseeing financial information. Thus it is important to understand how most large companies organize their accounting and finance personnel. What are the accounting and finance positions within a typical large company, and what functions do they perform?
Let’s look at an example to answer this question. Suppose you are the president of Sportswear Company, mentioned earlier in the chapter, which produces hats and jerseys for fans of professional sports teams. Assume this is a large public company. (The term public company7 refers to a company whose shares of stock are publicly traded—that is, the general investing public can purchase and sell ownership in the company.) As president of Sportswear, you ask the following questions:
- How much will we owe the government in income taxes for the year?
- What was total net income for the last fiscal year?
- Should we expand into new geographic markets?
- If we do decide to expand into new markets, should we obtain financing by issuing bonds, obtaining a loan from a bank, or issuing common stock?
- How profitable is each segment of our business (hats and jerseys)?
- How effective are our internal controls over cash?
The challenge is to determine who within Sportswear would be best suited to answer each of these questions. An organization chart will help in finding a solution.
Figure 1.1 is a typical organization chart; it shows how accounting and finance personnel fit within most companies. The personnel at the bottom of the chart report to those above them. For example, the managerial accountant reports to the controller. At the top of the chart are those who control the company, typically the board of directors (who are elected by the owners or shareholders). Review Figure 1.1 before moving on to the detailed discussion of each important finance and accounting position.
Figure 1.1 - A Typical Organization Chart
*Represents vice presidents of various departments outside of accounting and finance such as production, personnel, and research and development.
**In addition to reporting to the chief financial officer, the internal auditor typically reports independently to the board of directors and/or the audit committee (made up of select members of the board of directors).
Chief Financial Officer
The chief financial officer (CFO)8 is in charge of all the organization’s finance and accounting functions and typically reports to the chief executive officer.
The controller9 is responsible for managing the accounting staff that provides managerial accounting information used for internal decision making, financial accounting information for external reporting purposes, and tax accounting information to meet tax filing requirements. The three accountants the controller manages are as follows:
- Managerial accountant. The managerial accountant10 reports directly to the controller and assists in preparing information used for decision making within the organization. Reports prepared by managerial accountants include operational budgets, cost estimates for existing products, budgets for new product lines, and profit and loss reports by division. (Note that some people use the term cost accountant interchangeably with managerial accountant. Others consider cost accounting a specific function of managerial accounting that focuses on measuring costs. In this text, we use the term managerial accountant and assume that cost accountants focus on measuring costs.)
- Financial accountant. The financial accountant11 reports directly to the controller and assists in preparing financial information, in accordance with U.S. GAAP, for those outside the company. Reports prepared by financial accountants include a quarterly report filed with the Securities and Exchange Commission (SEC) that is called a 10Q and an annual report filed with the SEC that is called a 10K.
- Tax accountant. The tax accountant12 reports directly to the controller and assists in preparing tax reports for governmental agencies, including the Internal Revenue Service.
The treasurer13 reports directly to the CFO. A treasurer’s primary duties include obtaining sources of financing for the organization (e.g., from banks and shareholders), projecting cash flow needs, and managing cash and short-term investments.
An internal auditor14 reports to the CFO and is responsible for confirming that the company has controls that ensure accurate financial data. The internal auditor often verifies the financial information provided by the managerial, financial, and tax accountants (all of whom report to the controller and ultimately to the CFO). If conflicts arise with the CFO, an internal auditor can report directly to the board of directors or to the audit committee, which consists of select board members.
Not All Organizations Are Alike!
Question: The organization chart in Figure 1.1 is intended to serve as a guide. However, all organizations are not the same, particularly smaller organizations. How might the organizational structure differ for a small organization?
Smaller organizations tend to have only one or two key finance and accounting personnel who perform the functions described previously. For example, one accountant might perform the financial and managerial accounting duties while another takes care of the tax work (or the tax work might be contracted out to a tax firm). Instead of employing its own internal auditor, an organization might hire one from an outside consulting firm. Some organizations may not have a CFO, or they may have a CFO but not a controller. An organization’s structure depends on many different factors, including its size and reporting requirements, as indicated in the Note 1.23 "Business in Action 1.2".
Business in Action 1.2
The Organizational Structure of a Not-for-Profit Symphony
Financial limitations prevent a small not-for-profit symphony in California from hiring full-time finance and accounting employees. In spite of having annual revenues approaching $200,000, all financial transactions are processed and recorded by a part-time bookkeeper hired by the symphony. The bookkeeper also inputs budget information and provides monthly financial reports to the treasurer. The treasurer, a volunteer member of the board of directors, is responsible for establishing the annual budget and providing monthly financial reports to the board of directors. An outside firm prepares and processes all tax filings, assembles annual financial statements, and performs a review of the accounting operations at the end of each fiscal year.
Notice how the symphony does not have any of the formal positions identified in Figure 1.1, with the exception of the treasurer. This illustrates how financial constraints and reporting requirements may require an organization to be creative in establishing its organizational structure.
It is important to understand the key accounting and finance positions within a typical company and how each position fits into the organizational structure. The chief financial officer (CFO) oversees all accounting and finance personnel, including the controller, treasurer, and internal auditor. The controller is responsible for the managerial, financial, and tax accounting staff.
REVIEW PROBLEM 1.3
For each of the six questions listed at the beginning of this section for Sportswear Company, determine who within the company would be responsible for providing the appropriate information. Assume Sportswear has the same organizational structure as the one shown in Figure 1.1.
- The tax accountant is responsible for determining the income taxes to be paid to various government agencies.
- The financial accountant prepares the annual report, which includes the income statement where net income can be found.
- Although several personnel would likely be involved, the managerial accountant is responsible for providing financial projections. However, the financial accountant might provide historical information for existing geographic segments, which would form the basis for the managerial accountant’s estimates.
- The treasurer handles financing decisions.
- Detailed financial information that goes beyond what is required by U.S. GAAP may be provided by the managerial accountants.
- The internal auditors are responsible for evaluating the effectiveness of internal controls.
- A company whose shares of stock are publicly traded.
- The person in charge of all finance and accounting functions within the organization.
- The person responsible for managing the accounting staff that provides managerial accounting information used for internal decision making, financial accounting information for external reporting purposes, and tax accounting information to meet tax filing requirements.
- The person who assists in preparing information used for decision making within the organization.
- The person who assists in preparing financial information in accordance with U.S. GAAP for external users.
- The person who assists in preparing tax reports for governmental agencies.
- The person responsible for obtaining financing, projecting cash flow needs, and managing cash and short-term investments for the organization.
- The person responsible for confirming that controls within the company are effective in ensuring accurate financial data.