Five Ways to Help Clients Maintain Accuracy in Financial Reporting

Accuracy in all financial reporting is essential for regulatory compliance. In the case of an external audit, having this information readily available and up-to-date saves both time and money instead of paying one or more people to trace records from months or even years prior. The longer a company takes to gather applicable records, the more suspicious it appears to those requesting the documentation. Even if no fraud was committed, the initial suspicion can linger, leaving a potential negative mark on an otherwise clean account.

While the importance of maintaining accuracy is clear, it can be a challenging task, especially for small- and medium-sized businesses that lack the resources of larger organizations.

Responsibility and consequences

The person or persons in an organization responsible for maintaining these records varies depending on the industry and the size of the business. Larger companies often have entire finance or accounting departments—sometimes both—while smaller operations might only have a single individual who compiles reports and usually performs multiple roles within the organization. This person may handle the final reconciliation as well, but small companies frequently outsource some or all of these responsibilities. Utilizing a software program is beneficial, but if the manual inputs are incorrect, the outputs will be, too.

Failing to maintain accurate records can have severe repercussions, including legal penalties accrued if regulations are not adhered to. This can result in the loss of credibility for both the business and the business owner and impacts the confidence of existing investors, lenders, and stakeholders. When confidence is shaken, further business opportunities for a potential sale, merger, or investment disappear, which can stifle growth or even result in closing the business. This can also lead to a decline in employee morale and may cause a higher turnover.

Critical elements

To create and maintain a comprehensive accounting policy, it is essential to implement well-defined policies and procedures. Promoting compliance and mitigating risks are two of the most crucial factors, along with ensuring consistency. Because staff turnover is a normal part of running a business, having established systems simplifies the process for the next employee to start off from where the previous person left off instead of trying to create a new system from scratch on the fly.

One of the best ways for businesses to improve their financial reporting accuracy is by utilizing the COSO Framework. Accountants can start with a risk assessment to track the flow of money and identify any areas open to risk that require more effective checks and balances. Next, they can determine the scope, which includes the specific standards and principles to be applied, and then guide the implementation of control procedures.

Once policies are implemented, consistent monitoring of controls is required to ensure individual contributors are fulfilling their roles and that the procedures function properly. Frequent monitoring and review also provide an incentive against procrastination, which can increase the risk of errors. In addition, the business should assess the effectiveness of its internal controls on an as needed basis and identify procedures for improvement.

Five ways accountants can help clients

Savvy accountants who provide valuable guidance, training, and support can help clients maintain proper financial reporting. Here are five ways to accomplish this goal:

1. Develop and maintain internal controls. Determine the division of labor and what approvals are required for each process. The individual responsible for collecting money should not be the one who reviews their own work.
2. Provide training and support. When new procedures are implemented, the affected staff should be adequately trained and then supported. Including this in an established onboarding process for new employees gets them up to speed faster. This can be accomplished through mandatory videos, sponsorships for specialized training, or lunch-and-learn events where an expert comes to train new employees.
3. Conduct regular internal audits. This ensures the policies are effective and that all data is current and accurate. Long-term undetected issues can escalate quickly. These internal reviews are good practice for external audits when the organization’s processes must be shown, along with the final results.
4. Keep current with regulatory changes. Systems and timelines can be established to review applicable regulations for continued compliance.
5. Leverage technology. This is especially important for small companies with less manpower because automating certain processes saves time and money. An individual can be assigned to review the output to ensure proper functionality. Many low-cost and free resources designed for smaller businesses are available, making the software more budget-friendly in the long run than incurring costs to pay someone inside or outside the company to perform the job manually. As the organization grows, the software can be scaled up. Medium-sized businesses can use local or cloud-based enterprise resource planning (ERP) systems that monitor financials, employees, and human resources with all-in-one software.

Common mistakes

A lack of communication and coordination between departments and the individual responsible for collating departmental data can result in delays and inaccurate reporting. Some organizations have a tendency to apply quick fixes to a problem, which can create long-term issues. These temporary Band-Aids can be especially detrimental when employee turnover occurs. Another common mistake occurs when decision-makers put more emphasis on what is bringing money in the door and reallocating funds away from accounting.

Though a majority of companies have policies in place, and some may have a dedicated financial individual or team, written and formal procedures may be inadequate. Organizations will benefit from frequent evaluations to determine what areas need improvement. One possible solution is to incorporate more automation into the company, but over-reliance on technology is a mistake that many companies make. There is room for error if any step in a process requires manual input. The remedy is to create a system for someone to review and verify the data reports.

Transparency, confidence, compliance, and sustainability

The future of financial reporting will show an increased use of automation and artificial intelligence to improve the efficiency and accuracy of an organization’s checks and balances. Regulations continue to change and evolve, especially when new types of business come into existence.

When cryptocurrency started, the government established new legislation to ensure accuracy, taxation, and legality. Emphasis on data security is critical, which many came to realize after the Equifax breach. Approximately 82 percent of small businesses fail because of cash flow problems. Not only is accurate financial reporting necessary for legal purposes, confidence, and transparency, but it can save or destroy a business.

======

This article, and others submitted to CPA Practice Advisor, are reviewed internally. However, all opinions expressed above are solely those of Adedibu Adesokan, unless specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. Financial strategies should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

======

Adedibu Adesokan is a senior associate who has worked in the accounting industry for many years. He has experience working with consumer products, oil and gas, and private equity clients. He earned a BSc in accounting from the University of Mississippi. Adedibu has worked locally and with global teams on financial statement audits, tax compliance, and M&A transactions. For more information, contact adedibu.adesokan@gmail.com.