Internal accounting rules

The Accounting Act

§ 11. Internal accounting rules

(1) An accounting entity, except a micro-undertaking, is required to draw up internal accounting rules that establish a chart of accounts together with a description of each account’s content, and which regulate, among other things, the documentation and recording of business transactions, the flow and retention of source documents, the keeping of accounting registers, the recognition of income and expenses in the income statement, the stocktaking of assets and liabilities, the accounting policies and presentation of information used by the accounting entity, the procedure for preparing reports, the use of accounting software, and matters related to organizing accounting and to the internal control measures that go with it. [RT I, 27.12.2016, 1 – entry into force 01.01.2017]

Many business owners assume that drawing up these rules is purely the accountant’s job. But a company’s accounting is not the accountant’s private domain, and the decisions behind it are not the accountant’s alone to make – so writing the internal accounting rules can’t be the accountant’s responsibility alone either. To draft them, the accountant needs to know what the company does or plans to do; how work is organized; who is involved in accounting, and how, when it comes to preparing and passing on documents; who deals with employees and contracts; who handles the rest of the communication; who is responsible for what; and finally, what the company’s plans for the future are. It can also matter how the company’s investment and financing strategy affects its operations, its cash flow and its financial reporting.

There are plenty of templates for internal rules available, but it is always worth remembering that a template is just that – a template. It may not tell you enough, or tell you the right things, about your particular company and its accounting.

Templates are bound to contain a lot of surplus material, including passages of law that are essential to the template but have nothing to do with your company. They can mislead you, or – if the rules are drawn up superficially – leave important aspects out altogether. You can end up with rules that are wordy and long, and still too thin on the information you actually need.

Many companies’ accounting shares common ground and similar choices, but every company also has its own particularities, and those are exactly what the internal rules should bring out. In 2008, Ten-Team OÜ published “Raamatupidamise sise-eeskirjade koostamine” (“Drafting Internal Accounting Rules”). I was the author. Accounting has changed in a number of ways since the book came out more than ten years ago, but its core is unchanged, and the book is still used as course material, and for coursework, in several schools.

The book grew out of a real project. Together with our Tähelend accountants, we had begun taking over the accounting of a factory, and with the factory’s management of the day we had talked through a great many topics, agreed on a division of labor, and set up a system for organizing the accounting that everyone understood.

Along the way there were, of course, a few “aha” and “wow” moments, because drawing up the internal accounting rules exposed a number of weak or half-thought-through spots in other areas of the operation and the way work was organized. In the end, everyone was satisfied: the factory’s management, its employees, and the accountants. Everything had been thought through thoroughly while the rules were being written, and the system ran for many more years without major changes.

So here is my advice: when a company’s accountant sets out to draw up internal accounting rules, the company’s management absolutely has to be part of the process.

The whole thing goes much better if the accountant comes prepared with questions – questions that only management can answer. And it is the business owners who gain the most from it: a chance to think through how their business, their work organization and their accounting actually function, and whether there is room to run the company more efficiently.