Accounting problems have never been an easy issue to solve, but today presents some unique challenges. The IRS is ramping up its compliance and audit efforts while cross-border trade and transactions increase complexity for firms of all sizes. Although the Financial Accounting Standards Board (FASB) claims to be trying to keep GAAP accounting requirements nimble and less burdensome, those at the tail end of their decisions often feel differently.
But today’s era in accounting offers new solutions to old and ongoing problems in accounting. artificial intelligence, finance automation software, and streamlined data analytics combine with simpler payment processing methods and other next-gen tech to make your accounting team’s lives easier.
Still, though some issues in accounting are new based on shifting times, others are constant and have plagued executives for decades. Work with your team to understand some of today’s top accounting problems – and how to best address them.
What Are Accounting Problems?
Accounting problems range in severity, complexity, and frequency. But, while the details vary, the core definition of accounting problems doesn’t. Accounting problems are any identifiable, preventable accounting factor that contributes directly to a tangible negative outcome within your business, including:
- Inaccurate financial statements and regulatory filings.
- Physical and digital security risks, including fraud.
- Outdated accounting standards usage.
- Negative audit outcomes.
The keyword in our definition is preventable. Other factors, unforeseen and unpredictable, can impact your business negatively. The trick with managing accounting problems is that each of them is avoidable – if you have the knowledge, foresight, and tools to combat them,
What Causes Accounting Problems?
The root cause of every accounting problem is implied above – if you don’t have the knowledge, foresight, or tools to fight accounting problems, you’re not equipped to deal with them before they arise.
Beyond conceptual causes, though, material causes include (among many others):
- Lacking internal controls contributing to unnoticed human error and fraud.
- Financial teams not conducting regular training or keeping abreast of changing regulations and reporting standards.
- “Single points of failure,” where your financial and accounting cycle relies on a sole individual whether due to staffing concerns, competency, or training.
- Ethical causes that contribute to fraud, or even “soft fraud” wherein employees creatively interpret information to paint an artificially rosy picture.
The Top Ten Accounting Problems
No organization is perfect, and chances are high that your firm needs improvement within at least one of these domains. That isn’t bad, though – what’s bad is identifying an issue and not acting upon it. Remember, the first step in addressing your accounting problems is developing the knowledge to identity and act upon them, so understanding where your firm falls short kickstarts the process of optimizing your enterprise.
The Securities and Exchange Commission (SEC) is ramping up its enforcement efforts and prosecuted 9% more enforcement violations in 2022 than last year. Remember, the SEC won’t accept ignorance as an excuse for mismanaging accounting problems, and neither should you.
1. Human Error and Inaccurate Data Entry
Human error is the most common accounting problem, costing corporations millions of dollars annually. Manually managing thousands of lines of transactional accounting isn’t easy, and time pressure coupled with exhaustion can create sloppiness that creates a catastrophic snowball effect over time. These problems range from simple, such as double vendor payments, to far more difficult to untangle, like inadvertently missing payroll.
Solution: Accounting automation tools with baked-in validation checks and error notifications go a long way towards removing human error elements from the equation but aren’t a final solution. You’ll still need to implement robust staff training, both during onboarding and on an ongoing refresher basis. Third-party or automated audits, reviews, and reconciliation also help as a set of fresh eyes might catch errors those with skin in the game (or simple stat exhaustion) cannot.
2. Cash Flow Management and Statement Accuracy
Your income statement might paint a rosy picture, but if you can’t manage your cash flow, you’re in trouble – especially as higher rates increase borrowing costs and make credit management a trickier proposition.
Even if your physical cash management strategies are solid, keeping your cash flow statement compliant is another matter. Rules change often, and the SEC notes that “preparers and auditors may not always apply the same rigor and attention to the statement of cash flows as they do to other financial statements.”
Solution: The solution to this accountancy issue is double-pronged: First, ensure your accounting team is as diligent with your cash flow statement as other filings. Matching cash flow across all three categories is tough, especially if overseas transactions and currency exchange affect your bottom line, but many accounting tools can help serve as a vital assistant in the process. Second, develop a system like a third-party auditor to check your cash flow statement from an external, unbiased perspective.
3. Strategic Financial Analysis
One of today’s top commodities is data, but many companies don’t leverage the depths of data they generate when it comes to financial analysis. Even firms digging into granular aspects of marketing and productization often overlook the benefit that rigorous and objective strategic financial analysis offers.
Solution: Your financial platform likely offers tools to mine existing data. Some also offer analytics dashboards, while others require migrating to a third-party service, but extracting data from value is a two-fold process. Pulling the data tends to be the easy part, whereas consolidating it into a digestible and accessible dashboard to deliver insight can be elusive.
Remember, not everyone has the time or inclination to study reams of accounting documentation. To best derive effective and actionable insight from your data, it needs to be delivered in a format that helps stakeholders identify trends to shape decision-making with a quick glance.
4. Fraud, Waste, and Abuse
While we’d like to think employees, and even managers, wouldn’t defraud a company, the fact stands that human nature creates incentives that can send even the most honest workers down a bad path. Even in cases where fraud never happens, sloppy financial management can create significant wastage and unnecessary expense.
Solution: You should have a robust series of checks on expense management, with particular attention paid to approval workflows and order matching. Furthermore, you should schedule recurring reviews of your workflow processes, even if you manage a robust automated expensing and procurement system.
Maintaining an internal veil between departments and even individual employees while ensuring a sole staffer doesn’t have exclusive access also helps prevent payment fraud.
5. Account Reconciliation
If you don’t reconcile accounts properly, you’re in for a world of pain. Unreconciled accounts can paint a rosy picture on paper but leave you holding the bag when your real-world balances don’t match. At the same time, slipping slightly can compound rapidly as a missed reconciliation on a single account in one period can snowball into a six-figure error a year later.
Solution: This accounting problem is easy – reconcile your accounts often and accurately. Make sure your accounting team’s access runs the gamut of credit, banking, and other accounts to make sure nothing slips under the radar. Centralizing your account management on a single database tends to be a good practice, especially if your company juggles many accounts at once.
6. Security and Internal Controls
Too often, companies face one of two accountancy challenges related to internal controls. They either rely too much on just a few employees without external validation checks or outsource everything to software and adopt a “hands-off” approach. Both significant accounting challenges can bring a well-run company to its knees.
Solution: If you can’t keep a substantial separation between employees, i.e., running a small operation, you’ll need to set aside time to validate approvals as they route personally. It’s burdensome and time-consuming, but the effects of not doing so are far worse. If you can use automated accounting software to implement controls, ensure you’re still conducting regular reviews of the workflows to ensure they remain accurate and useful.
7. Misaligned Revenue Recognition
Properly recognizing revenue is tough, especially for subscription-based firms like SaaS companies. Worse yet, there’s an incentive to improperly time revenue recognition, as “borrowing” revenue today from tomorrow’s earnings can artificially inflate current reports and help boost a company’s image. But that short-lived boost tends to collapse quickly once the bill comes due.
Other misaligned revenue recognition includes channel stuffing, where companies push products to distributors without the necessary demand signal to pump sales stats. Some companies can even falsify revenue, particularly in cash-based businesses, but the trick doesn’t usually go unnoticed for long.
Solution: Ensure your accounting platform has accurate revenue recognition controls, and develop your operating procedure to address circumstances in which there’s a degree of uncertainty or room for interpretation. You’ll also need to ensure your accounting staff is up-to-date on changing accounting requirements and standards to maintain compliance as regulatory guidance evolves.
8. Non-Cash Expenses
Any time financial engineers, no matter how experienced, begin working with non-cash expenses, room for error multiplies. In some cases, the rules supporting non-cash expenses are unclear; in others, they’re open enough to interpretation that one accountant might generate a very different series of figures for the same circumstance.
Remember, non-cash expenses include:
- Depreciation and amortization
- Depletion
- Asset impairment
- Stock-based compensation
Asset impairment is one of the most common non-cash expense accounting problems. Determining value via mark-to-market accounting demands nuanced market understanding, accurate outlook, and honesty. For example, valuing assets like real estate requires a close look at local market factors, current condition, and how long the company has held the real estate asset. Depending on an individual accountant’s perspective, a real estate asset could be “worth” much more or less than another’s assessment of the same property. Inaccurate non-cash expensing can, therefore, create an artificially inflated balance sheet and cause concern that your company is misleading investors.
Solution: The best way to mitigate accounting issues associated with non-cash expenses is to have a comprehensive standard operating procedure for common items. Even straightforward non-cash expenses, like depreciation, should be meticulously prescribed to your financial team (i.e., whether an item depreciates along a straight line, via units of production, etc.). If you’re a smaller firm, your CFO or financial controller should prioritize codifying an SOP that addresses all non-cash expenses to save time and prevent legal entanglement later.
9. Payroll Errors or Inefficiencies
Smaller companies can’t usually afford to outsource their payroll, retirement benefits, and tax management requirements. This is understandable since third-party firms are costly and often unnecessary for companies with just a handful of employees. But, when you rely on less experienced internal assets to manage payroll, you open the door to significant problems in accounting. Certain benefit and tax structures are complex to navigate solo, but even basic salary payments are prone to miscalculation and error.
Solution: Remember – your employees are your greatest asset, and payroll errors are a great way to create dissatisfied staff. If you can’t afford to wholly outsource your payroll management, find a software solution that effectively serves your company’s payment and compensation structure. You may also want to spend the cash up front for consulting to get a solid system in place and pay for recurring audits along the way to ensure you remain on track.
<h3 id="10-technology-challenges”>10. technology Challenges
Not all of us are digital natives and certain sectors of the workforce struggle to adapt as accounting tech evolves. At the same time, your company might be totally dependent on outdated manual tools to balance the books and manage supplier payment accounts. While those systems and tools might have worked well in the past, shifting trends point to an imminent need to ditch outdated financial software in favor of something cloud-based and easily integrated within your existing workflow.
Solution: Training, no matter your platform of choice, is the first step to ensuring everyone understands the tools they’re given. Beyond that, depending on your company’s circumstances, you can solve this accounting problem by exploring tools that offer:
- Payment management across a spectrum of methods (ACH, check, card, etc.)
- BI and data analytics (see the third accounting problem)
- Recurring bill management
- AP automation and automated customer billing solutions
Conclusion
We’ve referenced it a lot in relation to solving your accounting issues, but automated financial and accounting tools go a long way toward solving problems in accounting. At their baseline, effective automated accounting tools free up untold amounts of time compared to manually managing your finances, freeing your team up to focus on business growth and operational optimization.
At the same time, these tools help prevent catastrophic results – in the event of fraud or regulatory noncompliance – while keeping vendors and customers happy by offering timely and accessible payment options. They also bundle a suite of security services to manage documentation long-term and keep your (and your customers’) information safe.
