FINANCIAL DEPARTMENT REVIEW

REPORT
TABLE OF CONTENTS

01 Financial Department Review Report

03 Executive Summary
04 Scope and Approach
05 Six Elements of Infrastructure/Capability Maturity
Model Assessment
07 Data Analysis
08 Selected Benchmarks
09 Activity Survey Results
10 Observations and Recommendations
21 Other Matters to Consider
29 Appendices
31 Benchmarks
37 Suggested Better Practices for Finance and
Accounting

2
EXECUTIVE SUMMARY

• Background Information
• Scope and Approach
• Six Elements of Infrastructure/Capability Maturity Model Assessment

3
SCOPE AND APPROACH

Internal audit was engaged to perform a three-week assessment of the current state of the finance function. In this assessment, (Internal Auditor)
would identify performance gaps and improvement opportunities in the finance department to ensure that the future state of the department will be
able to support the company’s ongoing business objectives, including:
• Relevant, timely and accurate financial information
• Appropriate finance team experience and knowledge
• Financial systems that provide appropriate functionality and report
Internal audit's work consisted of:
• Preparing a detailed project plan, including a communications plan
• Conducting a kickoff meeting with the finance department leadership team
• Conducting an analysis of the finance department infrastructure utilizing the internal auditor's six elements of the infrastructure framework
• Conducting individual interviews and focusing discussions with essential finance and operational personnel
• Reviewing and analyzing existing documentation prepared for SOX compliance efforts
• Developing an understanding of the nature, type and amount of effort expended to perform key finance activities
• Analyzing close data such as journal entries, accruals, allocations, account reconciliations, charts of accounts, checklists, financial reports, etc.
• Understanding the current systems environment as it impacts the finance processes (interfaces)
• Comparing the current state with better practices
• Benchmarking selected quantitative process data (i.e., cost, timeliness, quality, etc.)
• Identifying improvement opportunities based on the six elements of infrastructure analysis results
• Preparing a report to company management summarizing our work performed and recommendations
Internal audit would like to thank all the personnel at the company for their assistance in completing this project.

4
SIX ELEMENTS OF INFRASTRUCTURE/CAPABILITY MATURITY
MODEL ASSESSMENT (1/2)
The overall evaluation of (Company)'s finance and accounting function process maturity is presented below. Overall, the process maturity level is judged to be at the initial
state, noted by the red bar. Each of the six elements of infrastructure is evaluated independently. Conditions observed at (Company) are summarized on the next page.
(Internal Auditor)'s recommendations for capability enhancement, made later in this report, in general will enhance maturity to the "Repeatable" state, as defined below: It
was assumed that (Company) and ABG Inc. are focused on achieving no higher than a defined level of maturity this point in time.

Maturity People & Management Methodologies & Systems &

State Policies Processes
Organization Reports Tools Data

Reliability and Integrity of

Optimizing

Processes and Data

Managed
(Proactive)
Higher Cost/Benefit Zone
• Entitywide policy guidelines • Processes are uniform. • Accountabilities are clearly • Senior management is • Performance variability • Client server applications
are documented. • Risk oversight is articulated. comfortable with measures are improved are stable.
• Entitywide limits are integrated. • Integrated teams are in consistent formal and and consistent. • Architecture is scalable.
allocated. place. content. • Systematic approaches to
• Data capture controls are • Functionality is improved.
Defined in place. • Backup capabilities are in • Exceptions are reported. assessing loss exposure
• Processes for data
place. • Audit reports are used. are used.
organization are reliable.
• Roles and training are • Improvement initiatives • Alternatives are rapidly
analyzed. • Extraction, analysis and
standard. are discussed. reporting are improved.
• Status is reported.

• Business plans and • Policies are documented • Risk owners are clearly • Reports are regular and • Measures are improved. • System security is
policies are articulated. and stable. defined and supported. actionable. • Assumptions are improved.
• Policies are followed. • Process gaps are • Roles are explicitly • Key metrics are identified. consistent. • Models are improved.
• Limits are established. identified/corrected. defined. • Format and content are • Measurement methods • Data collection is
Repeatable
• People are trained. consistent. are specified. systematic.
• Improvement is being • Independent spreadsheet
developed. models are used.

Risk of Failure
• Policies are undocumented • Formal processes do not • Individual heroics are in • Processes are sporadic, • Measures are rough, • Spreadsheets are
or vague. exist. place. ad hoc, informal, oversimplified and may unstable. Ad-hoc data
• Limits are vague or • Few stable processes • Crisis management does incomplete and miss key characteristics. collection is unscalable.
Initial nonexistent. exist. not exist. inconsistent.
• Responses are • Coordination does not
reactionary/ad hoc. exist.
• Accountability is lacking.

5
 SIX ELEMENTS OF INFRASTRUCTURE/CAPABILITY MATURITY
MODEL ASSESSMENT (2/2)
Noted below each of the six process elements are the overall conditions observed during our review of the finance function. Each of these observations is dealt with in more
detail later in our report.

Maturity People & Management Methodologies & Systems &

Policies Processes
State Organization Reports Tools Data

Reliability & Integrity Of Processes &

Optimizing
(Transformational)
Managed Higher Cost/Benefit Zone
(Proactive)
Defined
(Essential Elements)

Repeatable

Data
(In Development)
Initial
(Reactive and Substandard)
• Processes are not defined • Organizational culture • A high-volume of • Spreadsheets are
Company • Policies are or documented. enables the ad-hoc and management reports are • Only rough measures are often used in the
undocumented, informal chaotic approach. generated; however, many in place. financial
• Responses to process
or vague. reports are not used and/or processes.
Finance •
Twenty-four interviewees
issues and exceptions are • Training or role clarity is are considered unreliable
• Systems currently do not
reactionary and ad hoc. ineffective or provide the level of detail • Some key
indicated that formal because they do not tie to
Function policies are not in place
• Risk is high because key nonexistent. key financial reports. on payments to accurately systems are not
Conditions (This was designed by
individuals are heavily create a cash forecast or interfaced to the
Observedformer management.). • Individual heroics with • A consistent definition of analyze vendor activity.
relied upon. general ledger.
limited coordination and sales margin is lacking.
• Many processes are teamwork exist. • Budgeting processes are • Few KPIs are
generally manual and • Significant challenges performed outside of the produced.
inefficient. • Performance can only occur when meeting new system in Excel
be predicted by reporting requirements. spreadsheets. • Reports are data-
individuals rather than

Risk of failure
intensive and lack
organizational analysis.
capabilities.

6
DATA ANALYSES

Selected Benchmarks
Activity Surveys

7
SELECTED BENCHMARKS

Introduction
Quartiles
1st 2nd 3rd 4th
Benchmarking is used as a measurement tool that promotes learning and Median
information sharing. Through benchmarking, supermarkets cannot Overall department
draw conclusions based on the benchmarks alone. Instead, this data was used in Finance Cost as a % of Revenue
conjunction with the activity surveys and interviews to look for symptoms and Staff per $1 million of Revenue
opportunities for improvement. Finance Span of Control
Month-end close activities
The benchmark population utilized for this analysis contains over X
Close the Books Month End
companies in multiple industries.
Close the Books Quarter End
We benchmarked certain selected process measures for company Close the Books Year-End
supermarkets. The data we have been provided to date allowed us to Manual Journal Entries Per FTE
identify and focus on opportunities for improvement. (Internal Auditor) did not Error corrections as a % of the Total
independently validate the data or perform any procedures to determine the Payroll
completeness or accuracy of the data. However, the data was reviewed for Direct deposit percentage
reasonableness and discussed with data owners. Specific scoring and Payroll processing error rate
quartile definitions are in Appendix A. Accounts Receivable
Better practices in areas where company supermarkets is in or below the third Remittance processing cost
quartile are provided in Appendix C or otherwise addressed in our observations and Average remittances processed per day
recommendations. Remittances first-time match
Remittance errors
The results indicated on the chart at the right depict the company’s current
comparison with the benchmark population. The first quartile includes the highest Accounts Payable
levels of performance, and the fourth quartile is the poorest performance. The A/P Span of Control
median performance is between Quartiles 2 and 3. Average number of invoices per payment
Cost per invoice processed

8
ACTIVITY SURVEY RESULTS
Sixty-one finance and accounting personnel completed activity surveys over a two- Number of Non-
Value
Surveys Value- Transactional Strategic
week period. The results of the survey indicate that X% of the company's activities Process Added Other
Completed Added Processing Activities
are non-value-added. In addition, X% of time spent is related to transactional by Dept.
processing. This represents an opportunity to eliminate non-value-added tasks,
streamline processes, decrease costs and increase efficiency. Accounts Payable X X% X% X% X% X%

Many examples of non-value-added tasks exist in all processes. Accounts

X X% X% X% X% X%
• Sorting Receivable
• Batching X X% X%
Budget/Analysis X% X% X%
• Copying
X X% X%
• Exception resolution and error correction Clearinghouse X% X% X%

Future-state processes should include the following best-practice concepts: X X%

Compliance X% X% X% X%
• Increase electronic invoicing from high-volume vendors.
Corporate X X%
• Scan invoices. X% X% X% X%
accounting
• Increase electronic payments. X X%
Payroll X% X% X% X%
• Increase materiality levels for making adjusting entries.
• Streamline reconciliation processes. Retail operations
X X%
X% X% X% X%
• Reduce manual journal entries.
• Standardize reporting processes. Supermarket Field X X%
X% X% X% X%
Audit
Potential task elimination includes the following: X X%
Tax X% X% X% X%
• Sorting
• Batching X X%
Treasury X% X% X% X%
• Manual check processing
• Manual journal entries Village Pantry
X X% X% X% X% X%
Field Audit
• Ad-hoc reporting
• Duplicative reviews and efforts ** One-time transactions and activities related to reorganization and divesture

9
OBSERVATIONS AND RECOMMENDATIONS

• Policies
• Processes
• People and Organization
• Management Reporting
• Methodologies and Tools
• Systems and Data

10
OBSERVATIONS AND RECOMMENDATIONS (1/10)
Policies
Intro Para Intro Para Intro Para Intro Para Intro Para
Policies and Procedures IntroofPara
• Point SaleIntro Para Intro Para Intro Para Intro Para Intro Para
Revenue
Intro
Business policies provide the Para Intro for
parameters Para Intro Para
employee IntroThey
activities. ParasetIntro Para
the tone Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para
• Price Administration
for the organization and define acceptable behaviors. Based on our interviews,
• Purchasing
(Company) does not have documented and/or updated finance and accounting
policies or procedures in place. The lack of defined, documented and approved • Revenue Recognition
policies and procedures results in: • Paid Scan Reimbursements
• Lack of accountability
• Receiving for Store, Warehouse and Corporate
• Ineffective oversight of employee actions
• Banking/Financial Institution
• Increased exposure to fraudulent activities
• Capital Assets/Fixed Assets
• Inefficient processes with redundant and/or missing activities
• Conflict of Interest
• A chaotic, ad-hoc financial processing and reporting environment
• Check Request
Recommendation
• Treasury
We recommend that significant policies be defined, documented and approved,
• Credit and Debit Memo
including:
• Approval Matrix • Delegation of Authority

• General Ledger Reconciliations • Exception and Non-Conformance

• Intercompany Accounting • Financial Spreadsheet Control

• Inventory
• Investments
• Manual Journal Entries
• Monthly Accruals

11
OBSERVATIONS AND RECOMMENDATIONS (2/10)
Processes

Financial Processes Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para
Recommendation
During our assessment,Intro Parakey
we noted Intro Para Intro
accounting Para in
processes Intro Para
which Intro Para
there Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para
Develop and document the key financial processes for performing key financial
are numerous, non-value-added activities and inefficiencies due to the functions. Actions should include:
absence of policies, desk procedures and training. These inefficiencies can • Documenting the current processes
introduce a higher error rate and can be attributed to:
• Identifying non-value-added activities and inefficiencies in the current processes
• Manual data entry and processing and inefficient use of the system-generated to include:
reports
− Functionality in a process that can be performed through automation vs.
• Lack of documented procedures for identifying and resolving processing issues manually
and/or errors
− Determining issue/error handling and resolutions that are not clearly defined
• Difficult, labor-intensive or cumbersome processes
• Automating process tasks where possible
• Lack of training on the company's processes
• Eliminating non-value-added tasks where possible
• No clearly defined and repeatable processes
• Training personnel on the new or modified processes
Accounting departments/processes that appear to have these inefficiencies include
AP/AR, treasury, budgeting, Cash (cash receipt and reconciliation), inventory, store
audits, and the quarterly and year-end close processes.

Defined, repeatable processes are essential in creating departments that have the
ability to focus on analysis and proactive accounting rather than reactive
accounting, which can decrease competitive advantage.

12
OBSERVATIONS AND RECOMMENDATIONS (3/10)
Processes

Store Audits Intro Para Intro Para Intro Para Intro Para Intro Para Intro
stores Parainclude:
should Intro Para Intro Para Intro Para Intro Para Intro Para
Our interviews with (Company) personnel determined that a complete store audit • Developing aIntro
Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Para Intro Para Intro Para Intro Para Intro Para
risk-based plan for the company's stores
process is not currently in place. The store audit does maintain a list of additional
− Identifying who is having the problems, shortages, overages, etc.
auditable areas but are currently not performing these. We noted that:
• Company audits only the cash side of the stores. • Reviewing personnel records to determine if they are adequately maintained to
ensure compliance
• Inventory transactions and physical stocks are not adequately covered in current
procedures. − Performance evaluations

• There are no activities surrounding risk-based auditing: − Payroll review to ensure verification of employees

− Which stores are having the problems, shortages, overages, etc. − Training records

− Compliance issues • Auditing markdown and price changes

• Identify the root causes of any potential financial leakage and/or identify cost − Conduct a comparison of the price change report and determine whether
savings opportunities. certain associates and/or registers account for an above-average number of
price changes, miscellaneous UPC sales or large markdowns.
The accuracy of the inventory largely drives the accuracy of the financial
statements. If inventory is inaccurate, the variance flows through the cost of goods • Comprising new criteria to guide the stores audit groups regular activities
sold, resulting in inaccuracies in reported profits. This illustrates the importance of
performing inventory procedures in store audits to ensure the correctness of
inventory as well as other assets.

Recommendation
Actions to improve the store audit function for the company as well as its individual

13
OBSERVATIONS AND RECOMMENDATIONS (4/10)
Processes

Fixed Asset ManagementIntro Para Intro Para Intro Para Intro Para Intro Para Intro and
Develop Para Intro Para
document Introasset
a formal Paramanagement
Intro Para program
Intro Para
that Intro
would Para
include
Intro Para Intro Para Intro Para Intro Para Intro
(Company) currently does not have an effective asset management program in Para
theIntro Para
following Intro
actions: Para Intro Para Intro Para Intro Para Intro Para
place. Furthermore, the following are the key asset management issues we • Creating an interface between the AP, fixed asset, and construction and
identified: maintenance systems, which will also include performing the following:
• Fixed asset invoices are manually entered into the fixed asset system instead of − Determining what key data needs to flow between the systems
automatically interfacing from AP.
− Determining the means/tools that will be used to reconcile the data between
• Assets are not tagged for tracking current user/location. the systems
• A defined asset lifecycle or asset disposition (disposal/resale) process is not in − Determining and analyzing the cost benefit of creating the interface
place.
− Re-engineering key financial processes to incorporate use of the interface
• Physical inventories are not performed.
• Developing and documenting procedures for tagging and tracking assets
• Reliance on store/districts to inform corporate when assets are no longer in use. through a lifecycle management process
Loss or mismanagement of assets can result in significant redundant spending. • Developing and documenting procedures for conducting physical inventories of
assets on a predetermined frequency basis

Recommendation

14
OBSERVATIONS AND RECOMMENDATIONS (5/10)
Processes

Journal Entries Intro Para Intro Para Intro Para Intro Para Intro Para Introand
Create Para Intro Para
document Introprocess
a standard Para Intro Para
around howIntro Para
journal Intro
entries arePara
recorded
Intro Para Intro Para Intro Para Intro Para Intro Para
Through discussions around the close-the-books process, we noted the following andIntro Para
reviewed Intro
and Para
should Intro
include Para
the Intro
following: Para Intro Para Intro Para
issues with the current journal entry process: • Reviewing journal entries prior to posting them to the GL
• No standards around how journal entries are recorded and reviewed • Requiring and maintaining supporting documentation for journal entries
• Inconsistent supporting documentation for journal entries − Standard cover sheets for standard and non-standard entries manually
− No standard cover sheet for standard and non-standard entries manually posted to the system
posted to the system − Formal review and approval process for standard and non-standard entries
− No formal review and approval process for standard and non-standard entries − Filing system requirements for where journal entry supporting documentation
− No documented filing system for where corresponding journal entry is maintained
supporting documentation is kept • Reducing or eliminating the number of journal entries for insignificant values by
• By sampling select journal entries for a one-week period, we counted X+ manual setting defined thresholds
journal entries less than or equal to $X. • Automating the process for creating recurring journal entries
• The financial system is not set up to automatically create recurring journal
entries
The accuracy of journal entries is crucial to ensuring the certainty of data used to
produce key financial statements for reporting.

Recommendation

15
OBSERVATIONS AND RECOMMENDATIONS (6/10)
People and Organization

Training Intro Para Intro Para Intro Para Intro Para Intro Para Intro aPara
Develop Intro
formal Para
training Intro Para
program for keyIntro Para
finance andIntro Para Intro
accounting ParaThis
positions.
Intro Para Intro Para Intro Para Intro Para Intro Para Intro would
program Para Intro
includePara Intro Para Intro Para Intro Para Intro Para
the following:
During our assessment, 24 of 24 interviewees mentioned an overall lack of training
regarding job duties, systems and tasks. This is especially critical for new hires or • Identifying critical tasks for the various positions
personnel transferring from one position to another in the company. • Documenting critical tasks and ease of accessibility of the documentation
Subsequent to the December 2005 announcement that ABC Inc., the financial • Conducting training for all employees on their critical tasks (including training on
management turnover rate was low and new employees would receive one-on-one automated systems)
on-the-job training. The turnover of finance and accounting personnel increased,
and the lack of written training material was unsuitable to provide adequate training Develop a training program for operations personnel. This program would include
for new employees. the following:

Other interviews revealed that tenured individuals with the company were not • Developing a schedule for training and publish to personnel
always sure why they reviewed certain reports and/or performed certain job duties. • Conducting training on different systems and their functionality
Training would help explain critical report elements or job duties, which may help
• Conducting training on financial and management reports and how to use the
employees perform their jobs more efficiently.
online reporting tool
The company would likely realize the following benefits from enhanced training
programs:
• Increased efficiencies in processes
• Increased capacity to adopt new technologies and methods
• Reduced employee turnover

Recommendation

16
OBSERVATIONS AND RECOMMENDATIONS (7/10)
Management Reporting

Reporting Intro Para Intro Para Intro Para Intro Para Intro Para IntrotoPara
Actions Intro
improve thePara Intro
financial Para
and Intro Para
management Intro Para
reporting Intro
function Para
for the
Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para
company Intro
as well as itsPara Intro Para
employees shouldIntro Para Intro Para Intro Para
include:
Based on our interviews with (Company) personnel, most consider the company's
reports to be: • Developing a team to determine key metrics needed for the necessary and
• Inconsistent, irrelevant and inadequate for most decision-making (The required reports. The team should inventory generated reports to determine if
company’s reports are dependent on manual processing and spreadsheets, the report should be eliminated, retained and/or combined. This will reduce the
particularly those created for ABC Inc.) number of reports printed and address the requirements for ABC Inc.
• Inconsistent from one month to another (prior period figures do not tie, format is • Incorporating a relational database where IT could use data from the GL to
inconsistent) (An example is management would look at sales numbers from generate accompanying valuable and useful reports
each period report and they would not tie to the quarter period report.) • Training accounting, finance and operations personnel on reporting methods,
• Incomplete in regards to period forecasting figures terminology, requirements and formatting
• Incomplete in regards to contractor cost information • Creating a unified reporting format to use throughout the departments to ensure
• Absence of aging information to help manage outstanding payments the consistency, relevancy and adequacy of financial reporting data

A high volume of management reports are considered unreliable because they do

not tie to key financial reports and do not roll from month to month." In addition,
key financial reporting metrics are not consistently defined.
Financial reports provide (Company) personnel the fundamental tools needed to
perform their day-to-day activities. Concise accounting reports help management
make accurate decisions regarding the major sectors of the business such as
finance and accounting, budgeting, merchandising, and operations.

Recommendation

17
OBSERVATIONS AND RECOMMENDATIONS (8/10)
Methodologies and Tools

Budgeting Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para
Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para
Based on our interviews, (Company)'s current budget process is labor-intensive, Recommendation
lacks a defined schedule, is uploaded through batch processing and is subject to
We recommend that management consider the following enhancements to the
data entry errors. The lack of an effective budgeting process could result in:
budgeting process:
• Poorly defined strategic objectives
• Ensure the budget is aligned with company strategic objectives.
• Expenditures that are inconsistent with company strategies and priorities
• Reduce the number of budget accounts.
• Ineffective means of forecasting cash flow requirements or ineffective controls to
• Automate the budget model to be able to provide dynamic forecasting.
monitor revenues, expenses, EBITDA targets, and planned capital expenditures
and departmental expenditures • Create and enhance the standardize system-driven budget reports.
The budgeting process ensures that (Company)'s revenues, expenses, EBITDA • Create a summarized budget model for use by upper management.
targets and planned capital expenditures are aligned with company strategies and • Integrate an analysis of working capital with the budget process.
priorities. It also enables management to monitor actual revenue and expenditures
relative to budget. • Develop a budget schedule of key dates.
• Develop a defined budget schedule and assign responsibilities and firm
deadlines and hold individuals accountable for these deadlines.

18
OBSERVATIONS AND RECOMMENDATIONS (9/10)
Systems and Data
Intro Para Intro Para Intro Para Intro Para Intro Para
Key Performance Indicators Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para
Recommendation
Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para Intro Para
During our assessment, 24 of 24 interviewees stated that (Company) had not Develop key performance indicators (KPIs) for the various departments throughout
established key performance indicators to measure financial and operational the company. This process would include the following steps:
drivers. • Establish strategic and operational goals in order to choose the KPIs that best
Key performance indicators (KPI) are critical for defining and measuring the reflect those goals.
progress toward organizational goals within the company's operational and • Analyze your mission and identify all your stakeholders so you have a way to
financial departments. They are quantifiable measurements, agreed to beforehand, measure progress toward those goals.
that reflect the critical success factors of the company, department, project, etc.
• Accurately define selected KPIs and ensure that they are quantifiable
(measurable).
• Set targets for each KPI.
• Keep the number of KPIs small to keep everyone's attention focused on
achieving the same goals.

19
OBSERVATIONS AND RECOMMENDATIONS (10/10)
Systems and Data

Automated Interfaces Intro Para Intro Para Intro Para Intro Para Intro Para Intro Parawhich
• Determine Introdata
Para Intro
needs to Para Intro Para
be interfaced Intro
between Para
key Introand
financial Para
Intro Para Intro Para Intro Para Intro Para Intro Para operational
Intro Parasystems.
Intro Para Intro Para Intro Para Intro Para Intro Para
Automated interfaces help ensure complete and accurate data transmission
between key financial and operational systems. During our review of application − This should include all data used to create/post journal entries to the GL.
interfaces, we noted that there are no automated interfaces between the following • Conduct a cost/benefit analysis to determine:
systems:
− Whether creating an interface provides an acceptable ROI, the best means
• AP to fixed assets for establishing an automated interface where one does not currently exist
• Cash concentration system and the GL (programming skills, additional software needed to implement, etc.)
We also noted the following: • Determine the process that will be used to reconcile the data transferred
between systems.
• Legacy AR system is still being used to process DSD advertising and
promotional contracts. The department does not currently have a timeline or − We suggest using an automated process in which there are error handling,
plan established for when the transition from the legacy AR system to the new data accuracy and data completion validation.
AR system will be completed. • Re-engineer and document business processes to take into account the
• Spreadsheets are used to move data between systems where there are no automation of newly created/re-engineered interfaces.
automated interfaces.
The lack of automated interfaces may result in the following:
• An inefficient, manual process for creating and posting journal entries to the GL
• Increased occurrence of inaccurate or erroneous journal entries due to lack of
spreadsheet controls and the nature of manual data processing
• More reliance on manual processes for reconciling data between systems
Recommendation
To help reduce the manual nature of processing data from one system to another,
we recommend the following:

20
OTHER MATTERS TO CONSIDER (1/6)

• Loss Prevention
• Pharmacy Audits
• Documentation Findings From Section 404 Analysis
• Management Information Systems
• Vendor Audits
• Contract Management
• Segregation of Duties
• Merchandising
• Payroll Check Processing

21
OTHER MATTERS TO CONSIDER (2/6)

Loss Prevention
Senior management mentioned that there may be opportunities to improve the loss prevention program.
Based on this, we provided selected financial information to our loss prevention consultative group. After their
informal review (not all required data points were collected necessary for a comprehensive review), they
informed us that the supermarket shrink numbers appear higher than the normal grocery industry standards,
specifically health, beauty and cosmetics (HBC) and general merchandise product (50% of company shrink
vs. 22% industry standard). This presents a potential opportunity for (Company) to identify the scope of their
loss condition, including identifying leading causal factors and developing industry-forward solutions to
reduce shrink and improve margin and EBITDA. The company may want to consider conducting a
comprehensive loss prevention risk assessment in order to formally determine potential opportunities. We
have previously provided to (Company) an evaluation methodology for such an assessment.
Pharmacy Audits
During our interviews, it was mentioned that third-party payment audits for pharmacy were not currently being
performed. Possible audit areas could include:
• Evaluating the accuracy of payments and identifying overpayments and duplicates cost savings prospects
• Identifying, validating and recovering underpayments
• Reviewing the timeliness of claim submission to the third-party insurer
• Reviewing if penalties for late payments have been collected
• Determining compliance with third-party insurers' contract terms

22
OTHER MATTERS TO CONSIDER (3/6)

Documentation Findings From Section 404 Analysis The help desk application can provide management the ability to identify
Prior to the acquisition (Company) was a non-accelerated filer and was problem trends, determine and provide routine answers for common
working toward compliance with Section 404 of the Sarbanes-Oxley Act. problems, and analyze the length of time it takes to resolve tickets.
The director of compliance documented and tested the key financial Based on additional follow-up with the MIS department, they stated that
processes. Although we have not confirmed the implementation status of implementation of “real” help desk software is presently in progress. The
the remediation actions planned, we have reviewed the issues identified help desk will begin exercising the software via entering a small portion
and noted several that remediation efforts may lead to process of the weekly support call information in the immediate future.
improvements as well as a strengthened control environment. PCI Compliance
Recommendation Although the company successfully passed a Level 2 PCI compliance
Continue with planned remediation actions for the identified significant audit, they have recently been informed that they are required to comply
internal control issues, such as: with a PCI Level 1 assessment in the next year. There are many
• No purchase order or contract management system for other than compliance requirements that may impact the company and village
inventory purchases pantry depending on the volume of sales transactions. These
requirements include:
• No accounts receivable (AR) system in place to administer the billing
• Background checks for certain MIS staff
of vendor contracts and related receivables
• Security awareness and formal training
• The current AR process being heavily dependent on spreadsheets
• Security policies
• Gross margin tracking reports being numerous and labor-intensive in
preparation • Encryption requirement for data with credit card information
Management Information Systems
Help Desk
Last year, 13% of MIS labor hours were used to provide help desk
support for the stores and corporate. The help desk department uses an
Excel spreadsheet to log, track and manage support.
23
OTHER MATTERS TO CONSIDER (4/6)

Vendor Audits
(Company) utilizes internal resources to perform vendor audits and leverages external parties to perform more detailed vendor recovery audits.
These audits are limited in scope and focus primarily on lost claims, duplicate payments and contract compliance. Reviewing data from
10/2004- 02/2007, the third-party vendor audits identified approximately $400,000 in recoveries over this period. Based on our review of these
audits, we noted that the audits did not:
• Detect potential fraudulent payment activity such as unusual vendor names, addresses, transaction dates or numbering schemes.
• Identify opportunities to leverage purchasing power.
• Evaluate the vendor master file integrity.
• Identify operational and control inefficiencies that drive organization costs higher.
• Address lost discounts and the timeliness of payments.
• Identify and correct the root causes of the financial leakage.
(Company) should consider expanding the scope of their audits to include the above.
Contract Management
Inefficiencies in the contracting process were brought to our attention during the initial interview process. As a result, we noted the following
observations where improvement could be made in the contracting process:
• As noted by the VP of merchandising, there is no contract management system.
• Direct store delivery (DSD) contracts are not entered into the headquarters contract entry and promotion management system at the front end
of the contracting process.
− Accounting personnel have to spend time on the backend of the contracting process to enter the contracts into the system. This could lead
to delays in set up of contracts and could lead to non-reimbursement of amounts due from vendors.

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OTHER MATTERS TO CONSIDER (5/6)

Segregation of Duties
During our review of the comments from (Company)'s Sarbanes-Oxley Act compliance work, we noted that there are key
financial segregation of duties (SOD) issues that management should consider resolving. Some of these SOD issues include:
• The same individuals initiate, record, manage wire and ACH payments and reconcile the related accounts. Per discussion
with the VP of treasury operations, this has been segregated for the past two years.
• The assistant controller of AP has superuser capabilities within the AP system and also serves as the system administrator for
access to the system. Per discussion with the controller, this access was removed last year.
• Both the VP of treasury operations and the cash management assistant have the capability to initiate, record and manage
assets. Per discussion with the VP of treasury operations, they have never had these capabilities.
• Individuals who receive all checks at corporate also record and reconcile the activity. Per discussion with the controller, this is
still an open issue.
• The AP disbursement clerk responsible for handling and mailing checks also has access to make changes to the master
vendor file. Per discussion with the controller, the assistant controller reviews all changes to the master vendor file.
• The AP supervisor can initiate, authorize and record pre-pay checks and void transactions. Per discussion with the controller,
this is still an open issue.
• Specialists handling miscellaneous cash receipt deposits to clearinghouse have incompatible duties - the same employee
receives, logs and deposits checks; records journal entry; and reconciles certain AR balances per discussion with the
controller, this is still an open issue.
The existence of these SOD issues can create an environment in which fraudulent activities can take place.

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OTHER MATTERS TO CONSIDER (6/6)

Merchandising
Per discussion with management, (Company) does not have the means to track all of the inventory levels by item or SKU at
each of the stores.
Additionally, (Company) stated that the key for it to know the profitability of items per vendor are inventory, cost, terms and
margin; however, merchandising is unable to get this information.
The current promotion management system has a functionality limitation because it cannot create more than one rule for pricing
for each SKU item. Merchandising is researching systems for rules-based pricing and pricing optimization to help optimize
product profit margin opportunities and product category targeted margin objectives.
Payroll Check Processing
During our review, we noted that only 27.6% of all employees utilize direct deposit. Additionally, one of the individuals
interviewed mentioned that two full time employees work solely on the payroll check runs, spending the first two days of each
week processing the payroll checks and the other three days of the week following up on questions, errors, etc. related to
payroll checks. By utilizing direct deposits or payroll debit cards, (Company) can reduce costs by eliminating the non-value-
added tasks of running payroll checks and the resulting follow ups.
In addition to promoting direct deposit, (Company) may want to research the use of payroll debit cards, which operate in a
similar fashion to any other debit card, except the account cannot be overdrawn. A company can set up a standard direct
deposit ACH that automatically loads the employee's cards with their net pay. Various payroll debit card programs also allow for
the employee to review their check stub information online.

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APPENDICES

• Benchmark Scorecard Detail

• Suggested Better Practices for
Finance
• Interview List

2
7
BENCHMARKS: OVERALL DEPARTMENT (1/5)

Quartiles
Finance Cost as a % of Revenue
Total Finance Cost / Total Annual Revenue
1st 2nd 3rd 4th
A X% Company is in the first quartile. Relative to other companies, (Company) ✓
spends less on its finance and accounting functions as a percent of total revenue. .11 - .63% .64 - 1.10% 1.11 - 1.74% > 1.74%

Staff Per and Million of Revenue

Total Finance FTEs/[Total revenue/1,000,000 1st 2nd 3rd 4th

At 047, (Company) is in the third quartile. Relative to other companies, (Company) ✓

.001 - .014 .015 - .030 .031 - .065 >.065
employs a higher number of finance personnel for every $X of revenue.
Finance Span of Control
Finance Staff FTEs/Supervisory FTEs 1st 2nd 3rd 4th
At 1.83 to 1, (Company) is in the fourth quartile. Relative to other companies, ✓
(Company) employs a higher number of finance managers for every finance staff 27.75 - 7.01 7.02 - 4.21 4.22 - 2.67 < 2.67

Employee.
Fourth quartile performance in this category could be indicative at:
• Undefined finance roles and responsibilities ✓ = Company ranking
• Reliance on manual processes
• Employee skills not aligned with position responsibilities

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BENCHMARKS: CLOSE ACTIVITIES (2/5)

Days to Close the Books: Month-End

At X days, the company is in the third quartile. Relative to other companies, the company’s month-end close
process is near the median in terms of number of days to complete.
Quartiles
Days to Close the Books: Quarter-End
3rd 4th
At X days, the company is in the fourth quartile. Relative to other companies, the company completes its
quarter-end close slower than other companies. ✓
9 - 12 days > 12 days
0 -4 days 5 - 8 days
Days to Close the Books: Year-End
At X days, (Company) is in the fourth quartile. Relative to other companies, (Company) completes its year-end ✓
close slower than other companies. 0 -4 days 5 - 8 days 9 - 12 days > 12 days

Manual Journal Entries Per FTE

[Monthly number of journal entries x 12]/Total close the books FTEs
0 -9 days 10 - 15 days 16 - 24 days
✓
> 25 days
At X annual entries per FTE, (Company) is in the fourth quartile. Relative to other companies, (Company)
records a higher number of manual journal entries.
Error Corrections as a % of Total ✓
(Monthly number of error correction journal entries/[Average monthly manual journal entries/percentage of 0 -73 JEs 74 - 253 JEs 254 - 550 JEs > 550 JEs

annual manually-generated journal entries])* 100%

At X%, (Company) is in the third quartile. Relative to other companies, (Company) records a higher number of
correcting journal entries as a percent of total manual journal entries. 0 - .75% .76% - 2.0%
✓
2.1 - 5.0% > 5.1%

Third and fourth quartile performance in this category could be indicative of: Unassigned and undocumented
closing activities
• Low materiality levels for closing entries ✓ = Company ranking
• Inadequate use of automated systems
• Errors in original data

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BENCHMARKS: PAYROLL (3/5)

Direct Deposit Percentage

Number of employees on direct deposit/total number of employees
With X% of their employees using direct deposit, (Company) is in the fourth quartile.
Relative to other companies, (Company) issues and distributes a higher
percentage of manual payroll checks to its employees.
Quartiles
Payroll Processing Error Rate
Number of payroll processing errors per year/annual number of timecards
With a X% payroll processing error rate, (Company) is in the fourth quartile. Relative to 1st 2nd 3rd 4th
other companies, (Company) experiences more errors per time-reporting employee.
✓
Fourth quartile performance in this category could be indicative of: 89% - 100% 69% - 88% 44% - 65% < 44%
• Insufficient encouragement by management to set up employees on direct deposit
• Overdependence on manual processes and forms for time reporting and benefits
1st 2nd 3rd 4th
selection
✓
0 - .073% .074% - .177% .178% - .523% > .523%

✓ = Company ranking

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BENCHMARKS: ACCOUNTS RECEIVABLE (4/5)

Remittance Processing Cost

Total remittance processing cost/annual number of remittances processed Quartiles

At $X per remittance processed, the company is in the third quartile. Relative to other
companies, the company performs slightly below the median in terms of cost per 1st 2nd 3rd 4th
remittance processed.
✓
< $1.14 $1.15 - $3.93 $3.94 - $8.28 > $8.28
Average Remittances Processed Per Day
Annual number of remittances/X workdays
1st 2nd 3rd 4th

At X invoices per day, the company is in the second quartile. Relative to other
> 438
✓
76 - 437 75 - 23 < 23
companies, the company performs above the median.
Remittances First-Time Match
[Monthly number of remittances matched first time x 12]/annual number of remittances
1st 2nd 3rd 4th
At X%, the company is in the first quartile. Relative to other companies, the company
experiences fewer discrepancies between payments (remittances) and open
✓
> 95% 86 - 95% 76 - 85% < 76%
receivables.
Remittance Errors
[Monthly number of remittances with errors x 12]/annual number of remittances 1st 2nd 3rd 4th

At .X%, the company is in the first quartile. Relative to other companies, the company
✓
< 1.2% 1.3 - 5.1% 5.2 - 11.3% > 11.3%
experiences fewer errors related to vendor remittances.
✓ = Company ranking

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BENCHMARKS: ACCOUNTS PAYABLE (5/5)

AP Span of Control
Quartiles
Accounts payable staff FTES/accounts payable management FTES
With a ratio of X staff to each AP manager, the company is in the second quartile.
1st 2nd 3rd 4th
Relative to other companies, (Company)’s AP department span of control is higher
than the median. > 11
✓
7 - 10 3-6 <3

Average Number of Invoices Per Payment

Annual number of invoices/annual number of accounts payable payments less 1st 2nd 3rd 4th
employee reimbursements
At XX invoices per payment, the company is in the first quartile. Relative to other
✓
21.0 - 3.5 3.4 - 2.4 2.3 - 1.8 < 1.8
companies, the company consolidates more payable invoices per disbursement than
other companies.
Cost Per Invoice Processed 1st 2nd 3rd 4th
Total annual accounts payable cost/annual number of invoices
At a rate of $X.XX per invoice, the company is in the first quartile. Relative to other
✓
$.40 - $2.79 $2.80 - $5.00 $5.01 - $9.12 > $9.13
companies, the company spends less per payable invoice processed.

✓ = Company ranking

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SUGGESTED BETTER PRACTICES FOR FINANCE AND
ACCOUNTING
The following practices are offered for consideration and implementation for areas in • Send remittances as email messages.
which (Company)'s benchmark results were in the third or fourth quartiles. • Automatically calculate and reconcile all payroll information.
Overall department Accounts Payable
• Document and define finance roles and responsibilities.
• Implement payment timing optimization with key suppliers, starting with the largest
• Document and approve policies and procedures. supplier first.
• Establish an organizational structure that empowers employees and enables • Actively pursue vendors to become EDI compliant.
effective delegation of authority without the need for excessive supervision. • Increase the number of invoices paid per payment.
• Align skills required for staff and managerial positions.
• Eliminate manual check generation and signatures.
• Exercise control through exception reporting.
• Use image processing for filing, routing and capturing invoice information.
• Put in place development plans for all staff, including succession plans for key
• Automate the three-way match and establish cutoff limits for differences.
finance managers.
Accounts Receivable
• Build cross-functional work teams.
• Automatically match remittances to outstanding invoices.
• Embed controls in technology allowing greater focus on business decision support.
Month End Close • Regularly reconcile accounts used for controlling accounts receivable and promptly
resolve differences.
• Set dollar threshold for post-closing entries.
• Automatically write off shortfalls using predetermined thresholds.
• Automate recurring journal entries.
• Clearly document procedures for the AR process to reduce the risk of fraud, errors or
• Avoid the month end bank reconciliation.
unsatisfied vendors.
• Convert serial activities to parallel ones.
• Defer routine work.
• Document the process.
• Reduce multiple approvals.
• Eliminate small accruals.

Payroll
• Use direct deposit.
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