Testing Accounting Software and The Need For Domain Expertise
This blog discusses some of the issues in testing accounting software and in particular when validating and verifying International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board (IASB). In a nutshell, IFRS is concerned with the preparation of financial statements. While GAAP ensures that these statements conform to certain rules in the accounting profession, IFRS is more principle based. IFRS guidelines provide much less detail than GAAP, and therefore have more room for interpretation. This leeway often leads to lengthy disclosures to explain the interpretation. In any case, validation and verification with regard to these two standards centers on data integrity and disclosure.
Some of the context involved in IFRS includes:
- Application of the same accounting policies throughout all periods
- Applying limited exemptions when restating prior periods
- Share based payment in its variety of forms
- Entity roll up in the form of subsidiaries in particular for events such as mergers and acquisitions
- Insurance contracts and how they are represented as assets and liabilities
- The value of assets and their depreciation
- Valuation of expenses and assets in exploration of natural resources
- The valuation of financial instruments such as cash, accounts receivable and accounts payable and the disclosure of risk involved.
- Related disclosures about different operating environments; for example in different market segments or countries.
- The fair value or price which an asset is sold or transferred.
As you can see, all of these parts of IFRS are related to the information, its consistency and integrity in financial statements. So, to validate this information requires testing to ensure that:
- Data is consistently propagated across relevant accounts.
- Principles are consistently applied according to known rules such as depreciation of assets.
- All periods have the same rules applied and reconcile through time.
- Different environments and their context such as currency valuation are consistently applied.
These are just a few of the issues involved in ensuring IFRS compliance within an accounting system when it comes to reporting financial statements. These issues lead to many testing considerations when ensuring that accounting software accommodates consistent application of rules and guidelines.
XBOSoft tests software for BlackLine.com, the accounting software of choice for companies like Costco, United Airlines, and the Los Angeles Lakers. In testing their accounting software over the last 10 years, one of the primary value propositions is to shorten the time to close by automating many of the daily processes such as account reconciliation. When accounts reconcile, no problem! But when they don’t, there are various reasons for it. And accountants used to pull their hair out in going through each transaction and researching why. BlackLine’s software automates this process through business rules that automatically match transactions saving time and headaches.
At XBOSoft, we are not accounting experts per say, but we do have members on our testing team who’ve received accounting certifications. Through the years, we’ve accumulated the expertise necessary in testing accounting software to understand the rules as they apply throughout the workflows of different roles in the closing process.
By automating the close and driving towards continuous accounting rather than doing everything at the end of the month or quarter, the time to close the books for any given period is reduced significantly. This gives more time and cushion to analyze and report results for their public company clients.