Accounting errors will harm, or kill, a business.
How is it that companies from small enterprises to major international corporations are so often bedeviled by accounting problems, and how can they be avoided?
At about this time last year it was announced that Uber, the ride-service company, had made a $50 million accounting error in New York City on how it paid its drivers.
Uber had been calculating its commissions incorrectly for its New York drivers. For three years, according to a Wall Street Journal report. The company took its commission from, drivers on the front end, before local taxes and fees. That seems a foolish and costly error, as Uber was said to have to repay its New York City drivers an average of $900 each.
Accounting errors can happen not only in collections, but projections. In Chicago, Ill., Edward-Elmhurst Health hospital system was short by $92 million on its estimates of payments it would receive from insurance companies and patients, the Chicago Tribune reported.
Large and small businesses are subject to similar problems, oversights, and mistakes. Small businesses, however, may not be able to weather such an accounting storm. Anyone who has ever worked a math problem knows that getting one number out of place is an ever-present danger, and in accounting such mistakes have cascading negative effects. Here are some basic things to do, and not do:
Avoid an abundance of accounting “creativity.” Creative accounting within law and regulations can reduce tax liability and increase return on investment. Creative accounting that pushes legal – or even ethical - boundaries is like driving downhill with no brakes: you find a way to stop or it ends in disaster.
It’s usually advantageous in accounting to stay in the somewhat cautious lane in reporting and meeting obligations. If the IRS fails to catch questionable creative accounting 100 times, it’s irrelevant if you are No. 101 when the red IRS flag goes up.
Revenue recognition: The IRS is very interested in how companies recognize their revenue for tax purposes. In Oct. 2018 the Financial Accounting Standards Board issued new revenue recognition regulations that took effect for public organizations after Dec. 15, 2017, and private companies after Dec. 15, 2018.
The government is running monthly shortfalls in the multi-billions of dollars, and its attention is concentrated on locating businesses that are misusing accounting - such as accurate revenue recognition – to reduce tax liability
Revenue recognition is a complicated subject, as are most tax-related issues. It’s possible to make innocent mistake. However, innocent or not, recognize that failures can be expensive in this vital aspect of business activity.
- Bad documentation. Documentation is the cornerstone of effective accounting. You can’t tell independent auditors or the IRS, “I don’t know where it is, so trust me.”
- Accurate documentation must support your decisions concerning how you assigned for tax purposes assets, liabilities, expenses, receivables, payables, and every other business aspect. Have you met the requirements of Generally Accepted Accounting Principles (GAAP), or misused or failed to follow a principle, possibly creating a series of subsequent errors? If it isn’t documented, it doesn’t exist, or perhaps fraud does, in the IRS’s view.
- Errors of omission, which, for example, can mean a needed figure wasn’t added to the accounting of a transaction or a figure; or commission, which may be as simple as adding rather than subtracting a figure, putting it in the wrong column.
Without accounting, there’s bad or faulty gas to run the business sales and service engine. Accounting is complex. Now is always a good time for reviewing your accounting systems. A formal review process greatly reduces the risk of mistakes, and last-minute changes produce the greatest chances for error.
Don’t ride as Uber did, to a whopping penalty, or worse.
This article was first appeared in Knox News.