Journal of Accountancy

Letters

Revisiting Lean Accounting

By Jerry Solomon

December 2004

“ The Lowdown on Lean Accounting ” ( JofA , Jul.04, page 69) was an excellent article. As a lean accounting practitioner, instructor and author, I would like to address some of its points.

One difficulty in realizing the financial benefits of lean is the offsetting profit and loss (P&L) charge that occurs when a company improves inventory turns and recognizes the deferred labor and overhead that has resided on the balance sheet for many years. Lean accounting does not cause this phenomenon to occur. The culprit is improved operational effectiveness in the form of better inventory management and improved turns. Any system that facilitates such improvements will have the same impact on the P&L. It’s a testament to lean accounting’s effectiveness that it is perhaps the only business system that has facilitated inventory management improvement.

The article states, “Those who have worked with lean companies contend that many standard cost accounting practices no longer make sense.” Most standard cost accounting systems do not make sense in any company. The information is usually incorrect, motivates improper behavior and does not facilitate decision making. Only when a business makes the shift to lean does the practitioner see an alternative cost system that is extremely appealing.

I doubt that any true lean practitioner would pursue speed and quality to the exclusion of cost. Investing in capital equipment is absolutely last on the list of lean priorities. Right-sized equipment designed and made in-house at a fraction of the cost of purchased equipment would be the lean approach.

The most insightful comment in the article was that since the concepts of lean accounting were generally developed outside the accounting profession, there is a great deal of resistance. Welcome to the lean world where change is the order of the day and 20- or 30-year-old paradigms must be thrown out. The accountants are no different than engineers or anyone else affected by dramatic change. The only ones that seem to accept lean concepts, albeit somewhat reluctantly, are the manufacturing folks who have been asked to change throughout their careers.

Finally, one of the basic tenets of lean is the customer value proposition. If accountants want to truly serve their manufacturer customers by providing information that is readily understandable and actionable, then lean accounting is a huge step in the right direction.

Jerry Solomon
MarquipWardUnited
Hunt Valley, Maryland

Letters

Implementing a New Audit Function

By Bruce Caplain

December 2004

As a follow-up to the article, “ Internal Audit’s New Role ,” ( JofA, Sep.04, page 65), which I thought was great, I would like to comment on the other side of the coin—implementing a new audit function.

As the article pointed out, it’s a whole new world out there for internal auditors and companies, but both need to be on the same page in order for the function to work.

For starters, when building a new audit function one must consider the following points:

Management must fully understand internal audit’s role. They must know that internal audit does not monitor controls, make decisions for business units, provide resources to other areas or act as substitutes for the external auditors.

Education is the key to success. If you ask 10 people to define internal audit, five won’t be able to give you an answer, and the other five will offer eight opinions. Therefore, when starting an internal audit function, particularly in this new environment, one must educate all levels including senior management and line management. Forget continuous auditing—one needs continuous education!

The article emphasized the need to hire the right chief audit executive—clearly important, but the CAE is then charged with finding the right staff. With Sarbanes-Oxley creating unprecedented demand for quality auditors, patience and persistence are imperative in this search. Settling for mediocrity is a recipe for disaster down the road. Our audit committee chair uses the acronym SWAN—smart, works hard, and nice—to represent the key elements for hiring quality staff. But as a new function, it also needs self-starters and ambassadors.

Experience also is a requirement. One cannot hire straight out of college anymore as the stakes are too high, and a new department cannot afford to spend the time training.

A new function must show progress quickly. However, this is often difficult as an audit can take several months to complete if thoroughly performed, not to mention the difficulties of getting staffed quickly. Some quick hits early can be as easy as communicating your mission statement, scope of work and type of services you’ll provide (audits, system development reviews and consulting). You should be developing and scoping your audit universe and initial audit plan, while at the same time getting staff on board and working on some audits.

These are just a few of my initial thoughts on some of what needs to be done immediately when starting an audit function.

Bruce Caplain, CPA
North Easton, Massachusetts

Letters

CPAs and Ministers

By Paul E. Dillman

December 2004

As a CPA who works with ministers in many denominations, I would like to comment on the excellent article, “ Tax Planning for Servants of God ” ( JofA , Oct.04, page 65).

I am always amazed about how little the ministers know—and even more so how little some tax professionals know—about this subject.

It has been a blessing to me over the years to receive thanks from some of the finest men and women in the world who are really giving to society from their hearts. I would encourage my fellow CPAs to ask their ministers how they can help them in this area. Many ministers are afraid to ask or think they cannot afford the services of a CPA. I offer my time as a ministry back to them at no charge and would encourage other CPAs to do the same. This is truly a chance to be of service and make a difference where it is needed and appreciated.

Paul E. Dillman, CPA
Oak Forest, Illinois

Letters

Drag Racers Go Straight

By Julie Jordan

December 2004

I was thrilled to see Patrick Joffrion profiled in the article “ Off the Beaten Path” ( JofA , Jul.04, page 49). Pat and I share a common bond of being CPAs and drag racers. After years of seeing him at various tracks in the country, I was pleased to attend an event at his track this past April. His first comment to me when he saw me was, “See, I scheduled the race for after April 15 so you could attend.”

There is one error with the article, however. A drag strip is not oval; it’s a 1320-foot (quarter mile) straight track whereby the first to the finish line is the winner. It’s usually joked that drag racers don’t know how to turn.

Thanks again for the great article.

Julie Jordan, CPA
Modesto, California

Letters to the Editor
The JofA encourages readers to write letters on important professional issues in addition to comments on published articles. Because space is limited, letters submitted for publication should be no longer than 500 words. Please include telephone and fax numbers. JofA e-mail address: JOAED@aicpa.org .

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