Why Financial Reports Are Often Inaccurate in SMEs

 

Causes of Inaccurate Financial Reporting

Many factors can contribute to inaccuracies in financial reporting, including inadequately trained staff, error-prone manual processes and inconsistent accounting methods.

1. Inadequately trained or incompetent staff across the company can directly and indirectly cause accounting errors. For example, warehouse staff may miscount inventory, and salespeople may make mistakes in travel expense reports — both of which can cause accounting errors.
2. Accounting personnel who are not up to date on accounting standards and regulatory requirements. GAAP, SEC and IRS standards and guidelines change frequently — recent examples include the changes to lease accounting defined in ASC 842 and the tax changes included in the Tax Cuts and Jobs Act (TCJA). Members of the accounting team may fail to stay current on the latest information, especially when they’re struggling with heavy workloads.
3. Manual processes. To err is human. Manual processes increase the likelihood of simple accounting mistakes, such as transposing digits, misplacing a decimal point, double-counting or failing to record an activity in a ledger.
4. Unclear communication between those setting accounting policy and those responsible for implementing it can cause errors. Examples of disconnects include misunderstandings about how to handle accounting estimates, such as reserves for possible bad debt.
5. Poorly integrated financial systems can create data havoc, resulting in errors through improper mapping of information between different systems and the need for manual intervention in the flow of data.
6. Inadequate review processes can result in errors slipping through, such as imbalances in intercompany accounts. This is often the result of poor time management, inadequate resources or misplaced priorities.
7. Inconsistent accounting methods among departments or subsidiaries can cause errors in financial statements. Examples include using different methodologies for inventory valuation or revenue recognition, and incompatible transfer pricing.
8. Chart of accounts misuse. Incorrect treatment of transactions, such as miscoding an invoice in the accounts payable process or misclassifying expenses as revenue, are errors that can obscure financial reporting.
9. Fraud. Schemes in which employees deliberately misstate or omit information in financial statements are relatively rare — but they are also the costliest type of workplace fraud that companies suffer.

 Why Financial Reports Are Often Inaccurate in SMEs