Internal Control of Fixed Assets: A Controller and Auditor's Guide

Preface

FOR MANY COMPANIES, FIXED assets, sometimes referred to as Property, Plant, and Equipment (PP&E) represent the largest single asset category on the balance sheet. Yet rarely do fixed assets command management time that is proportionate to the magnitude of the investment. Companies may devote significant resources to capital expenditure budgeting and approval, making extremely detailed calculations about proposed capital outlays. But once the project is completed, and in operation, subsequent record keeping and controls are often lax.

Management usually assumes that since fixed assets are “fixed” there should be little trouble monitoring what is going on. Accountants are concerned with calculating annual depreciation charges, for their company’s books and taxes. Occasionally, the property record will be the basis of decisions on insurance coverage for the assets. Even less frequently, property tax assessments may be challenged, but this is often the responsibility of the tax department.

So while there are many uses, and many users, of a good property tax accounting system, the one thing that is usually lacking is a reconciliation of the books of account to the assets actually present physically. While every company takes a physical inventory of raw materials, work in process, and finished goods, very few actually take a look at their “fixed” assets and compare what is there with what the property record says is there.

In short, there is a gap here in Internal Control, a ...