Actuarial Science - Life Insurance Terms - Topsides¶

A topside journal entry is an adjustment made by a parent company on the accounting sheets of its subsidiaries during the preparation of the consolidated financial statements. They are necessary for accounting as they can be used to allocate income or costs from the larger firm to the subsidiaries. The topside entry is a practice within the scope of the Generally Accepted Accounting Principles, also known as GAAP.

However, despite their intrinsic validity, topside entries have often been used to post fraudulent figures by reducing liability accounts or decreasing the stated costs. Firms that are going through mergers or restructuring transitions are the ones most susceptible to fraudulent misuse of topside journal entries.

Four Types of Adjusting Entries¶

Adjusting entries can be grouped into four categories. These include accrued revenues, which are the sums of money earned through sales invoices that have not been processed. The enterprise may have earned fees from serving clients, yet the books have not yet recorded the revenue as a receivable. Another type of adjusting entry is accrued expenses in which the costs are incurred, but the invoices for the vendors have not yet been implemented.

Deferred expenses are the third type. In the accrual mode of accounting, payments for future costs have to be deferred to an asset placement until the costs expire. The fourth type is deferred revenues, where the money was attained in advance of the service delivery.

Auditor Considerations With Topside Entries¶

The topside entries normally are not represented within the general ledger, and that means they are not subject to the same financial controls of the system as other adjusting entries. These entries do not even go through to the subsidiaries’ ledgers, meaning the subsidiary management is not entirely aware of the transactions and may not have the ability to validate them. They do not fall within the four adjusting entry categorizations, which is why they are harder for anyone not versed in accounting to spot. Auditing companies advise personnel to seek out the manual entries, especially those done after a fiscal reporting period closes.

During the evaluation of the appropriate nature of a topside adjustment, the auditor first interviews the executive management and reviews all the policies related to topside entries. Auditors also examine and endorse the supporting documents for economic backing and make sure the entry is entered appropriately within the consolidated financial statements. If the entries implemented caused decreased depreciation because of one factor or another, the auditor seeks documented confirmation from an expert appraiser to create some accountability.

Re-Validating the Profession¶

Accounting frauds that occurred during the past decade damaged the reputation of bookkeeping, which was once highly reputable. Managers must realize the relevance of auditing personnel when it comes to maintaining the reputation and credibility of their firms. Auditors also have to understand the significance of their obligation to make sure their clients are reputable. They must ensure the reliability of auditing as a profession by allowing as few discrepancies past their fingers as possible, especially the ones caused by topside entries.

The misuse of these journal entries has become increasingly worrisome in recent years, and it demands the use of exacting journal-entry testing procedures for visibility’s sake. Even though not all topside entries are fraudulent, the management and auditing personnel should keenly assess all entries of this nature to ensure visibility. Through paying close attention to the use of these entries, both auditors and executive management contribute to the restoration of trust that was once prevalent within the profession and their client base.

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