The human cause of 4 major accounting errors and how to eliminate them
By Shak Akhtar, SVP Finance Automation/Customer Experience Officer, Redwood Software
The reliance on manual controls and procedures remains a major cause of some of the most common accounting errors. We’re not just talking minor errors, such as an unmatched invoice, either. These manual processes result in material misstatements of financial results or business performance. All too often, they go out externally to regulators and investors.
This is despite investment—even recent investment—in ERP systems, workflow software and various point solutions. And just to be clear, for this blog I am just talking about human error. Fraud is a separate issue that I’ll be covering in a future blog. So why are manual controls and procedures still so common when they can have such a major impact on financial reporting?
Here are some common accounting errors:
A small reconciliation difference might hide the major issue that there is a massive undervaluation of an asset or an understatement of a liability. If you don’t do that reconciliation because you run out of time at month-end this can result in a material misstatement of your financial results and the need for last-minute top-line adjustments at group consolidation level.
This often happens when there is a liability incurred by the business that has not been recorded. For example, a project manager might have committed to using some professional services such as architects or surveyors on a capital project but hasn’t recorded that commitment or raised a purchase order. When an invoice suddenly comes in for £5 million for those professional services, it results in the need for more last-minute top-line adjustments.
This can be compounded by manual errors made at that adjustment stage, such as using the wrong currency. Because this error is made at group level and there are effectively no more checks, those incorrect numbers then get reported and can’t be corrected until the next period.
Head offices have certain central costs, such as running the HR team or a group program, that they allocate to subsidiaries through an intercompany charge. But if that intercompany charge is not picked up by all the subsidiaries correctly, it will result in a misstatement of your costs.
The problem is that it’s often not until you do the intercompany reconciliations or when the results go into group for consolidation that a difference like that is spotted. If you don’t have a handle on both the intercompany accounting piece and the reconciliations at a subsidiary level, then it only comes out at the very last minute as part of the consolidation.
Units of measurement
Accountants will be familiar with different units of measure. When a company makes a product, it will usually make them in batches of a certain number and that is one unit. However, when they sell those products, they are sold in different size batches and a conversion needs to take place. I have seen some spectacular unit of measure issues that result in a massive invoice being produced because the unit of measure has not been set correctly. So, you might have sold 1,000 widgets but you’ve massively overpriced them. If this doesn’t get picked up, it results in a material overstatement of sales and profit.
How finance automation helps you avoid these major accounting errors
A common issue running through all these errors is the lack of controls and checks to spot those manual mistakes before they result in material misstatements or the need for last-minute adjustments.
True finance automation enables you to build in those checks and scrutiny that would, for example, automatically alert you to a large invoice with a huge profit margin that might be the result of a unit of measurement error.
Automation enables those checks and balances on operations in real-time throughout the month, so those errors are discovered early and not left for finance or shared services to try to resolve during their peak workload, the month-end close.
Find out how to make your close a non-event with Redwood Finance Automation.
Get in touch with Redwood to find out more.