In our visits to mortgage shops we always inquire about the company's policies and procedures on financial controls, reporting and accounting.
Without accurate and timely financial reports, managing the affairs of the company can be extra challenging. Let’s take a look at a few examples of troubling practices.
Delaying the Generation of Financial Statements
We often find companies generating financial statements quarterly rather than monthly. In some cases financial statements are even generated 30 days after the close of each quarter. Major delays in generating financial statements can be disastrous. Management is basically running blind when they decide to put off financial position and performance reporting.
Operating losses or depletion of cash may result in warehouse lender covenant violations and loss of approval status with investors/dealers. Most operators have an idea of their financial health, but I’ve seen many cases where unexpected events led to unexpected shocks in the system. If a company is on the path of a train wreck, they'll stay on that path until pushed off of it. Needless to say it is much better to intervene sooner than later. We suggest management insist on generating monthly financial statements no later than 15 days after month end.
Accurate and timely financial statements are important, but equally important are accurate metrics of the activities of a company. We continually preach that “if you can’t measure it, you can manage it”. Metrics might be indicative of a strong performance, but you really need them to be granular in order to accurately measure the real “temperature” of a firm. Averages can be deceptive and don’t see the “sweet spots” or “dead wood”. For example, we see many companies measuring gain-on-sale (GOS) based on the total loans sold in a given month. However, they are not measuring GOS by investor, product, channel, branch or sales person. The details can uncover the good, the bad and the ugly.
Recently, we’ve seen a few companies using outside auditors to generate monthly financial statements. Sometimes internal accounting departments are performing most of the accounting functions – loan level reconciliations, AP, payroll processing, etc. The data is prepared internally and sent to the auditors to generate the financial statements. Other times, we’ve seen the auditors performing some of the actual accounting functions. Using an outside CPA firm to assist in the preparation of monthly financials is not an issue, but maintaining the auditor’s independence is important.