Common Pitfalls in Chart of Accounts Design

It is very interesting to speak with companies about their Chart of Accounts.  There are a lot of pre-conceived notions about what has to be in there. I’ve seen companies with over ten segments, total character length over 45 digits, mixed alpha-numeric- you name it.  However, very often companies feel themselves being crushed by the weight of the very chart they built so much intelligence into.  Very often, conversations about numbering conventions in the chart feel like people are developing the DaVinci Code.  I am a Chart of Accounts purist. I believe that less is more.

In my opinion, the COA is there to serve a very specific purpose.  It is there to satisfy the needs of your statutory reporting.  The COA is not the engine that drives all of your management reporting.  You can build hierarchies to your heart’s content in Hyperion or another reporting tool.

Some common pitfalls in COA design that I have seen include:

Building a hierarchy into your chart of accounts.  In today’s world, you don’t need to have a numerical hierarchy built into your account scheme.  Some companies build such complex ones that they are violated and garbled in year two of a systems life or blown up when an acquisition is made. Your COA hierarchy belongs in your reporting tool. Don’t get me wrong, if you want the 1000’s to be assets and 2000’s to be liabilities… that is fine.  However, mandating that account 1250 be related in some way to account 1200 is not necessary.

Building dependencies between segments.  This is another fairly common mistake.  Each field in the chart of accounts should be completely independent of one another.  In this fashion you have complete flexibility in the growth of your company.  For example, having a segment dedicated to region, which is a grouping of legal entities is a mistake.  You are forced to build a number of validation rules into your system that become cumbersome to maintain in the future.  Your regional split should be based on a hierarchy that exists in your reporting tools.

Alpha-numeric mixed fields. This one is a big pet peeve of mine.  I don’t ever like to see letters and numbers mixed in a COA segment.  Firstly, any speedy data entry person will be forever angry at you that they need to use both the keyboard and the number pad.  Think of the thousands of lost hours of productivity in your shared service centers.  Secondly, when exporting to Excel or any other tool, the fields become unwieldy, and rarely sort the way you want them to.

Ignoring localization requirements.  Sometimes large multinational corporations produce a chart of accounts that works perfectly in the country where the project team is based.  However when the chart is used cross border there is a problem capturing information that local authorities mandate should be in the chart of accounts.  Be cognizant of international rules. Bring your finance colleagues from around the globe into the COA design discussions.  While you may not be able to accommodate every requirement, you may be able to cover many of them by providing adequate space in the chart to capture some country specific pieces of data.

We should all remember the first word in General Ledger is General.  Keep it small, compact and free of extraneous information other than what you need to compile a good set of statutory accounts.  Always know that for detailed reporting, the main source should be your sub-ledgers.

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