Flawed financial reporting is an all-too-common quandary for accounting and finance teams at companies of all sizes.
From an incorrect figure on a cash flow statement to an overlooked deadline or technical glitches and misunderstood regulations, opportunities for error abound.
Financial reports are, of course, expected to capture a company’s overall financial performance, disclosing essential information to investors, bankers and other stakeholders. While the markets are tracking the company’s value and performance, regulators are watching for compliance with Generally Accepted Accounting Principles (GAAP).
Despite the potential for negative repercussions from faulty reporting—e.g., market reaction, government inquiries, investigations and enforcement actions, civil and criminal penalties—many companies continue to face challenges in releasing consistent, accurate financial statements.
The slippery slope syndrome
Inaccurate financial reporting is a slippery slope. What starts as a small blunder can cause steep consequences. One accounting error, when made over numerous business units over multiple reporting periods, can have exponential outcomes. Mistakes take a toll on everything from a company’s reputation to its ability to raise capital and could even cause a drop in share price as shareholders lose confidence in the organization’s ability to produce accurate reports. Errors can also sour lenders on financing critical projects or cause discord with a potential merger or acquisition.
Worse yet, materially misstated figures may trigger a lengthy, costly SEC investigation into accounting practices.
What causes accidental financial reporting errors?
Accounting and finance departments are under great pressure to keep up with a dynamic regulatory landscape, even as many are short staffed or lack key skills needed for financial reporting. This pressure can cause problems when preparing and presenting financial statements. Some common pitfalls include revenue and expense recognition problems, faulty valuations, missing or insufficient disclosures, and other failings. Other problem areas include:
Legislative and regulatory confusion
As regulations evolve, companies need to understand new rules, requirements and deadlines to ensure U.S. GAAP compliance. For example, when the Financial Accounting Standards Board (FASB) announces a new rule, personnel may require training to ensure they understand the new standard and its effective date. Moreover, complying with changing laws and regulations may require companies to change certain operational processes, internal controls and even business systems. Without a proactive strategy, and already stretched to their limits, some finance teams struggle to get up to speed, even as financial reporting crunch time approaches.
Human error and outdated technology
To err is human; however, in an era of new and improved technology and modern models of accounting, many mistakes can be systematically avoided. With the widespread implementation of rapid, adaptable, efficient and customizable technology solutions, it’s no longer necessary to manually extract data from multiple sources using antiquated technology. Artificial intelligence tools, such as machine learning and automated data validation, can further reduce the potential for human error by identifying discrepancies, streamlining processes and enhancing decision-making accuracy. Other modalities, including AI-powered analytics, can be deployed to proactively reduce risk and ensure more reliable outcomes.
Aligning process, systems and people
Companies can avoid errors by evaluating, upgrading and fine-tuning process and systems and putting the right people with the required skills in place.
Build a better model
An up-to-date, innovative system for financial reporting can improve efficiencies and reduce time preparing reports. If you lack the time or resources to improve your processes internally, consider using external help to evaluate and streamline your financial reporting processes, lessen the burden on your finance and accounting teams, and bolster confidence in reporting.
Stay on top of compliance
Look for and identify inappropriate accounting practices. Improve internal control and general accounting improvements and automate system capabilities related to regulatory compliance. If needed, work with a subject matter expert to educate staff on new standards and rules.
Invest in professional development and training
Provide ongoing training to personnel on technological and systems upgrades and new regulations. Pro-actively enhance professional development programming. A seasoned expert can provide custom training tailored to your specific needs.
Expand and develop flexible teams
Make sure you have enough hands-on-deck to handle reporting. An overworked team is at greater risk of failing to record transactions, missing deadlines or introducing manual reporting errors. If needed, bring in interim or permanent resources with the right experience and skill sets to hit the ground running.
Tap subject matter experts and resources
Find trusted advisors to help you ensure your processes, systems and people work seamlessly and effectively. Connect with auditors to help identify reporting issues. Talk with peers to brainstorm solutions. And don’t hesitate to bring on experienced problem-solvers who can guide your overall strategy, train your personnel, find staffing solutions and improve efficiencies.
Lead with confidence
Attention to financial reporting comes from the top. Top managers need to communicate regularly with senior staff and throughout the organization about the importance of vigilance in reporting.
As the urgency of the season grows—and your teams are staring down looming financial reporting and tax preparation tasks—take time to evaluate your staffing and expertise gaps, rather than waiting until the last minute, when you are at risk of missing key deadlines.
SolomonEdwards specializes in empowering the Office of the CFO with tailored solutions in accounting & finance operations and corporate tax services. From streamlining financial processes to navigating complex tax regulations, our seasoned experts deliver precise, timely reporting and ensure compliance, helping you make informed decisions with confidence.
About the Author
Sridhar Kuppa is a Principal in SolomonEdwards’ Transaction Regulatory and Advisory Services practice. He is a CPA with over 15 years of consolidated financial reporting, management reporting, budget planning and analysis, and expertise in US GAAP and IFRS financial reporting. Sridhar also has experience in the manufacturing industry with special focus on revenue recognition, product profitability analysis, and inventory valuation. Sridhar has excellent leadership, communication, and project management skills.
