Accuracy In The Financial Accounting Process Accounting Essay

Category: Accounting

Controlling, detecting and improvement has become an important business strategy and key factors to success, growth and enhance competitiveness. The most significant quality issue is variability in the process. The variance in the process is naturally occurred, but, when it is exceed its control limits it cause to dissatisfy customer. Hence, quality improvement should be applied to reduce variance and this is can't be done unless using statistical process control techniques. SPC aims to get and keep process under control through detecting assignable causes and providing surveillance and feedback.

In order to feel how importance the Statistical Process Control in quality improvement, we have asked to select a quality issue. After long discussion, we came out with an issue which is very vital in Finance, specially, maintaining the financial statement. The theme is: Accuracy of F/A processes

Some of the projects where Six Sigma methodology can be applied include the following:

Reduction in time to close books

Improvement in shareholders' value

Accuracy of F/A processes

Effective implementation of dashboards or performance measurements

Timely implementation of improvement actions to achieve growth and profitability objectiveThe

Six Sigma is implemented to affect the bottom line. In a corporation, Six Sigma starts in operations then moves into design and finally supporting areas. Finance and accounting (F/A) functions are involved to monitor the financials, however, they aren't involved in practicing Six Sigma. At Motorola, the F/A department was ones of the first to practice Six Sigma. Due to the nature of regulatory compliance, F/A departments have higher expectations for accuracy. However, improvement in F/A hasn't been considered critical. Six Sigma quickly brings a great deal of improvement. To improve from three-sigma to six-sigma performance levels requires more than 20,000 units of improvement. Such improvement can't happen without involving every department. In other words, Six Sigma means lots of changes and reengineering. As the pressure to improve profit margins grows, no department can afford to be excluded from Six Sigma implementation. Every department must assess its value contribution to the corporate performance. Recent studies report that businesses face the following changes or challenges in F/A departments:

Finance executives see business performance management becoming their top priority Lack of high-quality and business-oriented professionals Business performance management processes aren't keeping up with the complexity of organizations Information needs to be improved to ensure governance, control and shareholder value Automation and outsourcing will become key processes to reduce cost.

The main function of F/A departments has been to compile the financials, manage reporting process and ensure compliance to regulatory requirements. However, F/A roles are changing. F/A folks can no longer afford to be the corporate cops; instead they must act as partners in business. The cost of the F/A function, typically 3-4 percent of sales, must be improved as in other departments. In addition, the focus of F/A must shift from transaction processes to executive decision support and control. New expectations for F/A are being set, including the following:

Proactively drive decisions regarding business model design.

Drive holistic, integrated frameworks for success.

Implement dynamic controls and risk management.

Implement a competitive finance cost structure.

Be a key integrator of process, technology and people.

With new expectation, the roles of F/A must shift toward performance management, value assurance, executive accountability and decision management. Accordingly, the performance measurements will include financial and nonfinancial measurements, objective and subjective measurements, operations and accountability, and control and improvement. The F/A would become responsible for corporate performance improvement activities, which may include the following:

Ensure quality, timeliness, and cost measurements for key functions.

Facilitate aggressive goals for providing better, faster and more cost-effective solutions.

Analyze, understand and utilize performance information to continually identify opportunities for improvement.

Learn new methodologies and drive improvement.

Applying Six Sigma in F/A is no different than in other departments. The key is recognizing gaps or the opportunities for improvement. One must break down processes in manageable pieces by mapping the process and looking at the internal workings of the department.

Steps to Six Sigma in F/A include:

Establishing objectives and roles

Seeking customer feedback and identify opportunities for improvement

Identifying key performance indicators and opportunities for improvement

Establishing Six Sigma goals for F/A functions

Formulating and prioritizing projects, and forming teams l Providing Six Sigma training at the Green Belt level to team members

Implementing DMAIC for breakthrough solutions

The next section provides a details description of the process and how error in the process anticipates to poor quality. In this report we discuss also some important typical charts and statistical process control techniques such as control chart, histogram, scatter diagram, ogive and so forth. Finally, for the sake of enhancement of the process, there are recommendations posted at the end of the report.

Introduction

The accounting process is an ongoing process for any organization. It is a process which involves systematic recording of data's and inputs, sensitivity is a crucial thing while recording the datas and so the accounting process is a vital process for any organization. The process involves different steps and accuracy is very important in all the processes. The following flowchart illustrates how the process is run.

As it clear shows the process has more steps, means, the rate of variance occurrence is high. Because the delay issue will appear in about every corner. To eliminate the variability we must use process control method, specifically, the control chart.

statistical models for quality control and improvement

Financial Accounting process is an ongoing process which goes on every year with new datas being feed into the system every time. Accuracy is one of the important factor to have less deviations in the process of accounting. The errors can lead to fatal breakdowns in the whole chain of financial process if one data is missed or error occurs. The primary factor on which the accounting process is based is the number of times an entry takes place in the books of accounts

Age and gender

Scientist found out that women are 100 times more likely to get breast cancer than men, and the risk of developing it increases as she gets older due the estrogen hormone that stimulates the breast cell growth. Such long and continuous harmonic exposure increases the risk of developing such disease.

To make the data obtained more understandable, a histogram will be constructed as follows:

A histogram is a graphical tool that helps understand and interpret groups of data in order to extract more information and get more details out of these data. With the help of histograms we are able to know where most of the data are located and how spread out they are. In the above histogram we have organized the data into different classes which will help find out the frequent data in each class.

But before we try to discuss and interpret the above histogram, we will first calculate few important figures that will help us extract the required information.

a- measuring the central location: where most of the data are located.

X (Mean )= 4

Mode = 3,5

Median = 4

b- measuring data variability

Range= 6 Variance = 4.4 S = 2.1 C/V = .5

As we can see from the above histogram, the histogram is asymmetric, it is in fact a left (negatively) skewed histogram, and where we can find the left tail of the distribution is considerably longer than the right one. The center of this histogram is located at the interval (55-60). Half of the accounting cycle (50%) falls in the entry 50-60; this number clearly indicates the important role of number of entries. The more number of entries relates to higher risk of developing an error. Hence accountant should try getting more concentration and minimizing the risk of doing double entries and thus making more errors.

variable control chart

Simply, a control chart is a statistical instrument and presents a graphic display of process stability or instability over time. It mainly used to:

Scrutinize process deviation over time.

Discriminate between special cause and common cause variation.

Communicate how a process performed during a specific period.

Now, the time of deciding to opt whether attribute or variable control chart. Because the quality issue is about delay time in mammogram procedure, means the data is measurable. Then it is compulsory to work with variable control chart.

Regarding to which forms of control chart should be used. Based on our quality issue, the Run chart is selected. Simply, because, the sample size is relatively small and there are rational subgroups of data. In addition, a good sampling plan would be to take five consecutive pieces to make each subgroup Firstly; we have to start drawing the run chart to feel how much variance within the same sample. If the line process within control limits, then we can draw the x bar chart. Otherwise, we should reconstruct the run chart and eliminate abnormal values.

Hence, we discuss about the run chart, let's highlight the benefits and limitation of the run chart.

Advantages:

Investigating how well or badly a process is functioning.

Determining when changes are truly improvements by displaying a pattern of data.

Giving path as you work on improvement and information about the value of particular changes.

Disadvantages:

The Run chart monitors the process location over time. Run Charts are NOT control charts, as they do not have statistical control limits. For that reason, they may not be used to establish statistical control of a process or to measure process capability.