When to Write a Procedure (#161)
/In this podcast episode, we discuss when to write an accounting procedure and when to avoid doing so. Key points made are noted below.
Characteristics and Usage of Procedures
The core issue is, do you write a detailed how-to-do-it procedure for every conceivable activity in the department? On the plus side, this is a really good training tool if you have a lot of inexperienced new hires, and they just don’t know how processes work. It’s also good from a controls perspective, because auditors like to see that there’s a written procedure in place, and that you’re following what the procedure says. It also tends to improve the consistency of processes.
Those are the good points. Then we have a lot of downsides. Systems are constantly changing, so you have to spend time updating whatever’s been documented, as part of the process of changing the systems.
Also, if you decide to write a massive number of procedures, that’s going to take a lot of time by either senior staff or consultants. Either way, there’s a fairly large cost associated with it. And on top of that, updating the procedures is expensive.
The next problem is issuing updates. If you have lots of people who use the procedures, and especially if they’re in multiple locations, you may have to send out either complete replacements for the procedures manual, or a lot of minor updates to three-ring binders. In the latter case, the recipients have to keep swapping out the old pages and putting in the new pages. So the updating process requires a lot of time by the people using the procedures.
Next issue. Just sending out an update to a procedure isn’t enough, since you can’t really expect people to figure out the exact nature of the change. Instead, there needs to be training that goes along with the written procedure. Again, we’re racking up a lot of cost and staff time.
But we’re not done yet with procedure problems. The next issue is rigidity. If every last conceivable process step has a written procedure for it, then bureaucracy sets in. This means there’s a specific, approved way to do everything. By default, that means every other way is not allowed.
The end result tends to be way too much reliance on a massive procedures manual, where the response to every question is – I don’t know, let me go look that up. And by the way, the largest complete set of corporate procedures I’ve ever seen was three feet thick.
And speaking of bureaucracy, a massive set of procedures also calls for a full-time staff to support it. Which does not strike me as being a very good idea from a cost perspective.
And one more issue with bureaucracy is that the use of best practices pretty much disappears. Instead of thinking of better ways to conduct a process, a written procedure just locks it in where it is right now. And that means the efficiency of the department stops improving.
When to Create Procedures
By now, you may have figured out that I’m not exactly advocating having a lot of procedures. Instead, you need to figure out that fine line between too many procedures and too few. So here are a few guidelines to consider.
First, is a process highly repetitive? If so, you need a procedure, because every transaction should be completed in exactly the same manner, and a procedure can control that. Otherwise, there’ll be just enough variation that the auditors will call you out on having processes that aren’t being followed consistently.
Second, is there a significant risk of loss? For example, something like a wire transfer. Even if the volume is low, a single screw up could cost a lot of money. In this case, write a procedure. And again, this is exactly the place where an auditor is going to look for a procedure, and they’ll expect the procedure to be followed perfectly, every time.
Third, what’s the nature of the business? If you have a highly repeatable business, like a retail store, then most processes should be handled in the same way in all locations. This is one of those cases where having a fairly large procedures manual is expected.
And fourth, is the process really complex, with many steps? If so, even an experienced person could screw it up, so it makes sense to have them walk through every step, every time, just to make sure that they get it right.
And that pretty much covers the cases where you need procedures. In all other cases, I suggest that you do not have formal, written procedures. And by avoiding procedures, you’re also giving the staff a certain amount of leeway, which may result in some imaginative thinking about how to do things better.
So in summary, in most cases, you should have a relatively small procedures manual that only covers the most high-volume, risky, or complex processes. This allows you to easily swap out the manual when there’s a procedural change, with minimal staff time and not much expense. And it also means that you avoid getting bogged down in those dozens or hundreds of minor processes that really don’t impact the department or the company all that much.