Definition of Top-Side Journal Entries

In accounting, a top-side journal entry is a manual adjusting entry recorded at the corporate level, often when preparing consolidated financial statements for subsidiaries. Although such entries can be valid, they are often used to perpetuate fraud by closing gaps between actual operating results and the results reported to the investing public.

Use

A valid use of top-side journal entries is to allocate income or expenses from a parent company to its subsidiaries. However, top-side adjustments can also be used to improperly reduce liability accounts and increase revenue or decrease expenses. Companies undergoing mergers, acquisitions or restructuring are particularly susceptible to the fraudulent misuse of top-side journal entries.

Problems

Top-side entries generally do not appear as entries to the general ledger, meaning they are not subject to standard financial system controls. The entries don't flow through to subsidiary ledgers, so the subsidiary often does not know of these transactions and cannot validate them.

Audit Considerations

The Center for Audit Quality advises auditors to look for manual adjusting entries, including top-side journal entries, made after a financial reporting period closes. Auditors then should consider why the entry was made, who did it, whether that person was authorized to record an entry, when the entry was recorded and the underlying evidence to support the entry.

Internal Controls

Accountants responsible for a company's accounting system can put controls in place to ensure that top-side entries are used properly. These controls might include directly generating a list of recorded top-side entries from the accounting system before producing the final financial statements. Another suggestion, if the top-side entries are meant to be temporary, is to set the system to auto reverse them. Other controls include giving the system rights to only one or two people to record these types of entries and making sure that senior management approves all such entries before they are posted.

References

• Center for Audit Quality; Practice Aid for Testing Journal Entries and Other Adjustments Pursuant to AU Section 316; December 2008
• Institute of Internal Auditors; Maximizing Journal Entry Testing Through Automation; Rich Lanza and Scott Gilbert; February 2007
• Back Office Mechanics; No Ordinary Journals: Top-Side & Post-Close; Nancy Wu; Februrary 2010
• University of Tennessee, Knoxville; Using Topside Journal Entries to Conceal Fraud; Jordan Ray Marshall; April 2004