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By accrual twist of fate, general counsel should strive to submit correct accruals

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One of the speakers at the DataCert conference, J. L. Novak, General Counsel of AOL Paid Services, devoted a few impassioned minutes to explaining why vendor accruals and their accuracy are important to him. Evidently, if he misses an accrual, he is forced to walk through the CFO’s hot coals, and this he does not like!

His advice to peers: make sure your accrual figures are pretty close to the actual amount of the bills that arrive later and therefore push your law firms to save you from the coals (See my post of Oct.1, 2006: keep executives and CFO advised; Aug. 24, 2005: accruals; Sept. 17, 2005 #4: accruals; Dec. 21, 2008: should your produce monthly accrual figures?; March 11, 2009: Calgon GC possibly fired for blowing a big accrual; and June 1, 2009: US legal departments have to report incurred but unpaid legal fees.).

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One response to “By accrual twist of fate, general counsel should strive to submit correct accruals”

  1. Steven B. Levy, Author of Legal Project Management says:
    October 5, 2010 at 11:20 am

    Accurate accruals — stating at the end of a reporting period what you will be billed for work assigned to and done in that period — is critical to running a P&L. It’s doubly important at EOFY (end of fiscal year) and EOH1 (end of first half of the FY, when budgets are often shuffled and tweaked).
    A business cannot pay for work performed in one FY with funds from another FY. In other words, they can’t pay in January out of the new year’s budget for work done in December, nor can they pay in December out of “leftover” funds in the old year’s budget for work not begun until January.
    Clearly they CAN send you a check in January for work done in December; however, they must _accrue_ that work when they submit their month-end closing figures for December. This is sometimes difficult to grasp for firms that operate on a cash basis, where GAAP accrual rules may play but a minor role.
    While in theory firm attorneys should understand accrual rules, in practice I think it’s up to the client attorneys to educate them and remind them regularly, especially in the final month of fiscal halves and fiscal years. Accruals don’t have to be perfect, but they have to be close, or the CFO will box the ears — or worse — of the GC. The GC is running a business unit whose work happens to be the law, but it _is_ a business unit and she is responsible for accounting accuracy just like any other business-unit leader.