Improving Financial Reporting with Better Internal Control Procedures Over Fixed Assets

Improving Financial Reporting with Better Internal Control Procedures Over Fixed Assets

Managing fixed assets is one of the most challenging tasks for plant controllers, managers, and organizations. It’s especially challenging if the organization is capital intensive and decentralized.

Internal control issues over fixed assets – such as, inadequate asset descriptions, little or no use of property asset tags, inconsistent equipment and asset inventory, and poor documentation of asset movement – cause organizations to have inaccurate fixed asset records. Best-practices to fixed asset management enhance proper accounting, valuations and financial reporting.

In addition, inaccurate financial reports increase organization’s audit risk. It also exposes the organization to risks with property tax and insurance overpayments – for instance, tax assessments are based on the fixed asset accounting records, with rates applied to the assessed value, which means that if the organization has fixed assets that no longer exist but are still on the books, this organization can be overpaying taxes by up to 15%;

Likewise, fixed asset accounting records are used to determine the replacement cost of personal property, which affects insurable values. Fortunately, implementing better internal control procedures makes it possible to overcome these challenges.

Inaccurate Financial Reporting Linked to Inaccurate Fixed Assets

When managing fixed assets, one of the biggest challenges relates to reconciling accounting reports with physical records. This primarily occurs due to inadequate asset descriptions, but it also happens when there’s poor documentation of asset movement.

Both issues increase audit risk and may damage your firm’s credibility with key stakeholders, especially if an auditor issues a qualified opinion due to errors related to fixed asset reporting.

In some cases, inadequate asset descriptions are the result of little to no use of property management tags, which makes it more difficult to perform an accurate inventory count.

Since custodians of equipment and other fixed assets may be hesitant to report the retirements, there are opportunities for the assets to be moved without documentation.

Leading to inaccurate fixed asset reporting, particularly movements associated with asset dispositions and transfers. Finally, poor reporting increases audit risk when asset records aren’t properly segregated into asset classes.

How to Address Issues with Inaccurate Fixed Assets

Although fixed asset reporting is challenging, it’s possible to reduce your firm’s audit risk and increase the accuracy of inventory counts. Consider implementing these practices in your organization.

  1. Conduct Physical Inventory and Reconciliation
  2. Perform Depreciation and Useful Life Studies
  3. Implement or Upgrade to RFID Technology
  4. Affix Property Tags to All Untagged Assets
  5. Assign Construction Projects to the Proper Building and Equipment Accounts

Conduct Physical Inventory and Reconciliation

The first step to improving reporting accuracy is to perform physical inventory counts. Full enterprise inventory or asset cycle counts are all valid methods, but some are more beneficial than others.

The use of RFID offers the best combination of efficiency and accuracy, as it offers an automated electronic counting technology to reduce errors and speed up the counting process.

Once you perform a physical inventory, the next step is to reconcile your physical inventory records with the accounting records. The Line-by-Line Reconciliation methodology will identify and verify each asset record as either “matched assets” – items found during the inventory process and traced to the accounting records -, “unrecorded additions” – items found during the inventory process but not found in accounting records – or “unrecorded retirements – items found in the fixed asset accounting records but not fund during the inventory process.

This reconciliation process firstly compares and matched records by tag numbers, asset descriptive and locational information. Fiscal year additions are analyzed against estimated acquisition dates from the physical inventory.

Bulk purchase entries and grouped assets are allocated to individual assets, as any residual assets should be also verified.

Perform Depreciation and Useful Life Studies

After performing a physical inventory, take time to perform a depreciation and useful life study on each fixed asset. During a useful life study, one estimates the remaining useful life of each item based on its current condition and expected use.

The remaining useful life of a fixed asset can be used to calculate depreciation more accurately, increasing the accuracy of your firm’s financial reports.

Implement or Upgrade to RFID Technology

Radiofrequency identification technology uses tags and readers to track fixed assets. Each reader uses radio waves to determine the location of each item, making it easier to locate missing assets or track assets as they move through your facility.

RFID technology has several benefits for businesses of all sizes, including increased visibility and reduced labor costs. In firms that use traditional barcodes, employees must stand close to an item before they can scan its barcode with a handheld reader.

RFID readers can get information from tags from a great distance, speeding up shipping and receiving processes.

If your firm isn’t using RFID technology yet, consider implementing it now to increase the accuracy of your inventory counts. RFID tags make it easier to track fixed assets and make sure they get to the right place in the event of a building move.

If you’re already using RFID technology, think about upgrading to the latest tags and readers. Advances in technology have made it easier than ever to use RFID to track inventory and ensure your asset records match your physical inventory counts.

Affix Property Tags to All Untagged Assets

Using property tags is an easy way to improve the accuracy of your fixed asset records. These tags contain important information about each asset, such as the item number, brief description and intended location.

For example, a property tag for a machine may have the machine’s model number, a short description of what the machine does and a designation. Property tags reduce the risk of errors during physical inventory counts, ensuring your financial records match your inventory.

Assign Construction Projects to the Proper Building and Equipment Accounts

When a fixed asset is under construction, it should be assigned to your construction in process account and remain there until the project is complete and the asset is ready to use.

For example, if your firm is building new headquarters, the building would be assigned to the construction in process account during all phases of construction. When you put the building into service, that’s when you can transfer it into the correct account.

Why CPCON?

The CPCON Group has extensive experience helping companies enhance their internal controls and manage risk effectively. When you work with the CPCON Group, you receive cleansed and fortified asset accounting records to withstand audit scrutiny.

We also offer guidance on increasing efficiencies related to in-house inventory and reconciliation, generating cost savings in insurance and property tax, and maintaining accurate fixed asset accounting records with the dynamic RFID methodology.

At the CPCON Group, we advise our clients on best practices in fixed asset management, reconciling assets and estimating replacement costs to fixed asset accounting records.

To increase speed and accuracy in data collection by 25 times with over 98% inventory accuracy, CPCON professionals are ready to step in and assist you with the RFID deployment to asset management. Contact us today to learn how we can help your firm reduce its audit risk and increase accuracy in financial reporting!

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