Accounting errors: make no mistake

Companies have been doing bookkeeping for such a long time now that you could
be forgiven for thinking they have become quite good at it. But the evidence
suggests that many finance departments still struggle to produce the right
numbers. Take a look at some of the back copies of this magazine (or search the
web) and you will soon find terms such as ‘accounting errors’ and ‘restatement
of accounts’ making frequent appearances.

The reports that hit the press or even reach the attention of the regulators
represent just a minority of the problems that actually occur. Getting hard and
fast statistics in this area is impossible – finance directors and auditors both
know that many companies have had disasters or near-disasters in the production
of accounting information that they are keen to keep under wraps.

On rare occasions, a catastrophic breakdown of the finance function can cause
the whole company to collapse. And even if it does not go quite that far,
accounting mistakes can have consequences that are almost as serious. From a
corporate perspective, the public revelation of accounting errors damages the
reputation of the company concerned and can even lead to a fall in its share
price and the departure of senior finance executives with blighted CVs.

While senior heads rolling is one personal price that is paid, there are
others. Finance departments that are perceived (internally or externally) as
‘underperforming’ or ‘failing’ tend to suffer from poor morale, high levels of
absenteeism and recruitment problems.

Members of the finance team are often put under sustained stress by working
with systems that aren’t configured properly or by having too few people with
the right qualifications to plough through the work.

The question has to be, why do so many errors, mistakes and black holes still

Accounting failures occur for a variety of reasons. Although we all know no
system can ever be made fully foolproof or technology-proof, the best finance
departments take steps to ensure that risks are minimised.

The major strategic reason why accounting failures occur is because basic
transaction recording is not taken seriously. The adoption of risk management
strategies has become de rigueur in UK corporates over the last decade. One of
the key risks that company directors need to be aware of is an inadequate
bookkeeping system. Not only can this lead to errors in the accounting system
and lack of proper, effective control over the accounting system, it can also
result in failure to perform proper and regular reconciliations (such as bank
reconciliations, stock counts and stock reconciliation, purchase and sales
ledger reconciliation).

If companies think that their accounting function is at risk, they should
undertake a review to identify and then correct the weaknesses. Other
organisations have responsibilities in this sphere too (see box).

But the accountancy profession also has to take its share of responsibility
for downgrading the importance of bookkeeping. In the search to add value or
become a strategic partner to the business, too many finance departments have
come to see bookkeeping as just a tedious and boring chore.

At the same time, the nuts and bolts of bookkeeping have been downplayed in
professional exams, partly as a result of the need to understand the
increasingly regulated environment in which we operate (accounting standards,
tax legislation, and so on) and partly because of the increased emphasis on
analysis, interpretation and understanding.

In my work I often encounter the perception that bookkeeping is the exclusive
province of barely supervised junior or unqualified staff, and that it can be
commoditised and delivered more cheaply through extensive use of new technology,
outsourcing or centralisation in shared service centres (SSCs).

Ironically, while SSCs are seen principally as a cost-cutting move, properly
set up and run they can provide a robust system of capturing, recording and
processing accounting and management information. An SSC can ensure that all the
accounting processes are performed according to a set of rules that give
consistency in method and a quality in output.

An SSC is there to do a particular job and that focus can be used to produce
motivation and pride in work, generating a service ethos. The output of a SSC
will be measured against agreed and known key performance indicators. And using
an SSC offers a chance to re-engineer the finance function to make best use of
the skills, talents and experience of the accounting team.

It is no exaggeration to say that bookkeeping is the foundation stone of our
economic system. Company legislation still rightly places a duty on the
directors of a UK company to maintain proper books of account so that those
records can disclose the financial position of the business.

Regular financial reports are essential if corporates are to maintain
effective control over their finances and to ensure that they are trading
profitably. Those reports have to be reasonably accurate – in the jargon, free
from material error. Too often for comfort, they are not.

Get your books in order

Boards should review their accounting operations to ensure they are complying
with their legal duty to maintain proper books and records.

Finance directors should perform their own internal review to ensure their
systems are adequate, up to date and documented, and that the controls that are
meant to be in place are actually there and working effectively.

Auditors have a duty to assess the adequacy of a business’s accounting system
as a basis for preparing the financial statements (see statement of auditing
standard 300, para 11).

Regulators (the DTI, the Financial Services Authority, the Financial
Reporting Council and its subsidiaries the Financial Reporting Review Panel and
the Auditing Practices Board) should emphasise the importance to all companies –
especially listed and large private companies – of having strong accounting and
reporting systems.

Peter Charles is a former finance director and now runs
a consultancy and turnaround company

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