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Perfecting Cleanup Projects - A Guide for CPA & Accounting Firms

Maanoj Shah
Posted by Maanoj Shah on Nov 14, 2023 2:10:01 PM

The key to getting the best business lies in de-cluttering and accuracy; be it a Michelin Star restaurant, a local mechanic’s garage, or accounting. In accounting, these are not just choices. They are imperative. From simple human error to mishandling of books by accountants to defocused attention by business owners - the books may deviate from accuracy. And that is when a cleanup project comes into play.

For CPA and other firms that provide accounting services, we often hear, ”I can take more clients, but who will do their cleanup? Cleanup takes a huge bite out of our bandwidth”.

If this sounds like your firm, this article will provide a comprehensive guide that can help streamline the process. 

What are the key factors to a successful clean-up? 

When it comes to Cleanup, there are three key factors: 

      1. Comprehensiveness

  1. Cleanup projects demand looking at all accounting entries, reconciliations, provisions, prepaid and accruals accounts, and ensuring books are reviewed, end-to-end gaps are identified, and errors and omissions are corrected. A checklist becomes imperative to avoid any pitfalls. 
  3. 2. Quality

    The quality of a clean-up engagement is dependent on the comprehensiveness of your cleanup process, the expertise of your team, and ensuring you have all the data needed to do a real qualitative job. 
  4. 3. Speed 

    They say the first impression is the last impression. If you are able to manage a clean-up job on time when onboarding a new client, it sets the tone for a long and successful engagement.

The Cleanup Conundrum: CPA & Accounting Firm Challenges:

Most CPA and accounting firms face these challenges while undergoing the cleanup process: 

  • Data inconsistency: When firms receive cleanup projects, they are posed with scattered, conflicting financial data. From missing receipts to uneven categorization of transactions and records in varied formats - they could be a mess. Firms have to invest their time and efforts in consolidating this information, ensuring accuracy and readability. 
  • Correcting errors: Finding errors in lengthy financial records can be a tedious and draining task. But given their importance in business, it is important that CPA & accounting firms have to take the tough road to identify discrepancies, duplication, missed transactions, etc. Correcting these errors often needs extensive reconciliations and this is time-consuming and needs the involvement of a great deal of time and bandwidth.  
  • Staying compliant: Cleanups can be tricky because this is also where firms find out about the tax violation by their clients. CPA firms have to not just rectify the mistakes but also have to ensure that their clients meet the regulatory standards. After all, keeping clients away from legal complications is also the firm’s responsibility.  
  • Managing client expectations: Managing clients' evolving needs and expectations, addressing their concerns, and keeping them informed about progress is often a demanding task for most firms; nevertheless, CPA and accounting firms must adhere to these aspects as essential components of successful project delivery. 

Best Practices for Streamlining Cleanup Process 

Here are effective best practices that CPA and accounting firms can employ when navigating the cleanup process: 

  • Analyzing Client Books: A thorough review of the client’s financials, along with identifying the depth of inconsistencies is where you need to start.  
  • Assess the Intensity of Clean-up: When it comes to the finances, the muddles of all your clients will vary. It is critical to assess the severity and priority of the clean-up needed.  
  • Set Realistic Goals: Instead of making hasty promises and getting into unwanted clashes with clients, make sure to have established a clear, achievable timeline. Transparency is key.  
  • Gather Necessary Documents: To get started, you will need the company’s balance sheet, details for categorization, authenticity of deposit details, and income statement. You might also need details of interest and payments in case of outstanding loans. 
  • Maintain Open Communication: Giving regular updates to clients on the progress and clearing all doubts on time not only helps build trust but also makes operations smooth. 
  • Understand the business: For a comprehensive cleanup, it is essential to dive deep into the client’s industry. The knowledge of financial practices, challenges, and trends of their industry helps you perform better. 

The Ultimate Cleanup Checklist: 

Every firm and each of their clients pose a unique set of challenges, however, there are many that are applicable to most businesses. 

This comprehensive checklist will make your life easier: 

Review prior period transactions: 

  • Duration: At least one year or back to the previous clean-up. 
  • Objectives: Identify irregularities, missing entries, duplication, etc.
  • Method: Use tools or software to highlight unusual spikes or drops in transactions, suggesting anomalies. Some of the most popular software include Quickbooks, Zipbooks, Freshbooks, Wave, Xero, ZohoBooks, etc. 

    Reconcile bank and credit card statements: 

  • Focus Areas: Undocumented withdrawals, unclear transaction details, unmatched amounts. 
  • Best Practices: Compare internal records with bank and credit card statements. Flag unaccounted-for transactions. 

    Audit expense reports: 

  • Key Points: Review all expenses, ensuring they are legitimate and correctly categorized. 
  • Method: Cross-reference with receipts and invoices. Look for duplicate entries. 

    Evaluate asset and liability accounts: 

  • Assets: Ensure assets are recorded at their purchase prices. For tangible assets, check depreciation value, ensuring they follow the right method and rate. 
  • Liabilities: Review all liabilities, especially outstanding loans. Ensure interest calculations are accurate and all loan payment records are updated. 

    Check payroll and employee records: 

  • Key Components: Verify salary amounts, deductions, and benefits. Confirm that taxes are being withheld correctly. 
  • Best Practices: Cross-check the attendance records for paid leaves, overtime, and bonuses. Confirm that all employee-related payments, like retirement fund contributions, are made timely. 

    Review tax returns and payments: 

  • Objective: Ensure accurate reporting and timely tax payments. 
  • Method: Match tax return figures with the financial statements. Ensure you're availing all eligible deductions and credits. Confirm that payments align with reported amounts. 

    Standardize financial reporting: 

  • Importance: A standardized reporting format makes future cleanups smoother and reduces the chances of errors. 
  • How-to: Design templates for balance sheets, income statements, and other essential reports. If using software, utilize its features to automate. Train team members to adapt.  

    Review accounts receivable and payable: 

  • Objective: Ensure all payments owed to the business and amounts the business owes to others are accurate. 
  • Method: Cross-reference invoices with payment records. For amounts receivable, follow up on overdue amounts. For payables, ensure timely payments to maintain good relationships with vendors.

    Inventory reconciliation (if applicable): 

  • Goal: To ensure that the recorded inventory matches the physical inventory count. 
  • Method: Regularly perform physical stock counts and match them with recorded figures. Look into discrepancies immediately. 

    Regularly record and reconcile inter-company transactions: 

  • Focus: Ensure transactions between the parent company and its subsidiaries are correctly recorded and reconciled. 
  • Best Practices: Keep separate records for inter-company transactions. Regularly review and reconcile these to prevent duplication or missing entries. 

Regularly going through this comprehensive checklist ensures that a business' financial health remains robust and transparent. And while the process of cleanup is intricate and it demands meticulous attention and considerable resources, it is an opportunity for you to showcase your firm's expertise, attention to detail, and build a strong relationship with your client.  

Topics: Cloud Accounting


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