Top 10 accounting problems in an organization
In late 2001, the Arthur Andersen and Enron scandals in America drew attention to the problems of accounting and the scale of corruption that is possible through misappropriation of accounting in business organizations.
One of the largest bankruptcy in history, it shook the financial world as it led to closing of Arthur Andersen, one of the world's top five accounting firms.
This reveals how accounting rules are abused to paint a rosy picture of business growth contradictory to what might really be happening in a company.
Accounting problems build over time and needs visionary and intelligent analysis of facts and figures in order to understand what lies ahead.
As a member of Public Company Accounting Oversight Board (PCAOB) Charles Niemeier says, "Problems at the root of the accounting environment are more like the mozo bamboo plant. The South-East Asian bamboo plant can appear to lie dormant for up to five years before growing as much as a foot a day and to more than 100 feet in the coming years. The suddenness of that growth spurt is a bit deceptive though for as much of those early years the plant was developing a complex root system. It's only then that it has the foundation for its shoots to take off." Accordingly accounting problems too build up over time. When kept unchecked, accounting problems and misappropriations have lead to bankruptcy of many leading multinational companies as was seen in the past.
The top ten accounting problems are:
1. Playing with numbers
There can be many irregularities done while maintaining the accounts for a company such as the finance department may inflate the reported earnings of a company or company officials asking the accounts department to change the figures in order to show higher profits in business and gain personal benefits such as promotions, bonuses etc. They can show more profits than it actually is by \'gaming with the numbers”. This will increase their market share value for a short time but in the longer run the company might just end up in bankruptcy. This was as seen in one of the Fortune 500 companies. In a report of \' Congressional Research Service - The Library of Congress” says, in April, 2002, \' Xerox 120” paid a $10 million fine (the largest ever imposed in an accounting case) to settle an SEC complaint and restated its reported income since 1997. The SEC found that Xerox had improperly inflated its reported earnings by over $3 billion, primarily by recognizing future payments as current income. For example, revenue from long-term leases of Xerox equipment was reported immediately rather than at the time payments were received.
2. Not so clear
There is often lack of transparency in showcasing financial statements in an organization. There is a need for developed and standard accounting methods to have a clearer picture, both in private and public sector companies. Otherwise, this can misled the investors about the actual status of their investments and business growth. For e.g. Enron Creditors Recovery Corporation (formerly known as Enron Corporation), an American energy company, reported a revenue of $111 billion in 2000. Fortune declared it as \' America\'s most innovative company” for six consecutive years. But in late 2001, it was found that the positive financial growth was mostly manipulated through systematic and creatively designed accounting fraud. The profits and revenue of the company were result of deals with special purpose entities (limited partnership which it controlled). Hence, the debts and the losses were not reported in its financial statements. The share value of the company fell drastically from $ 90.00 to just pennies. As Enron was considered as a blue chip stock, the investors were devastated. Owing to complex financial statements that were published for the shareholders, it was years before the investors even had the slightest clue that something was going terribly wrong. The lack of transparency in the financial statements has often resulted in such cases of bankruptcy where the investors are the worst hit.
3. Accounting methods
There are often confusions as the finance department cannot judge which system of accounting will be best suited for the smooth functioning of a company. Like the finance department in a medical centre might be confused on how to account for patients coming with ailments that require long term treatment. Critics say that while accounting long collection period may indicate that revenue was over billed and ultimately may be uncollectible. There is a need for the evolution of a new era of standard accounting regulations as the world prepares for the convergence of national, international and multijurisdictional planes especially for publicly traded entities.
4. Dealing with outside agencies
The finance department often faces problems while dealing with outside agencies such as government departments, including tax departments etc., while seeking for sanctions or permissions etc. There is always a need for professional and dynamic accountants who can handle this shortcoming with intelligence.
5. Lack of communication
It is most often seen that there is a lack of intra-departmental communication between the finance department handling accounting and the management body of an organization. This makes it difficult for the finance department to keep a track of the business growth of the organization and even warn of possible threats it can face in the future. An accountant handling the figures of an organization on a daily basis most often develops expertise in analyzing the business and even may help in forming future strategies and contribute positively towards business growth of the organization. But in most cases the finance department is not involved while taking major decisions for the organization.
6. Reporting at gross
In some companies, the accounting is done based on reporting at gross. This led to inflating market share proportions. For e.g., eBay.com included the entire price of auctioned items into its revenue even though it had no ownership or credit risk for items auctioned online.
7. Revenue issues
The accountants may also face problems in determining what should be considered as revenues while accounting for an organization. There are often questions whether what is billed is considered as revenue or should it get logged only when the company receives the payments.
8. Human errors
There can also be human errors such as typographical mistakes. Such mistakes might lead to problems in the final tallying of the balance sheets.
9. Lazy bones
There can also be issues in accounting if the transactions are not updated on a daily basis. The accountant may forget to make entries of data of previous dates. This can lead to a faulty balance sheet.
10. Keeping an eye
The finance department might also face problems in the absence of a strong hierarchal administrative system. Such systems are highly recommended for keeping a check on any kind of misappropriation, whether deliberate or done by mistake.
These problems can be tackled in various ways. With the advent of globalization, the meaning of accounting and finance is constantly being redefined. The expanding purview of financial services has solutions for any problem under the sun. All that is required is to find the right way.
Louis Grumet, publisher of The CPA Journal and executive director of New York State Society‘s of Certified Public Accountants (NYSSCPA), says,Over the past couple of years, serious issues have been raised about the quality of audits of publicly funded entities across the country, including the state of New York. The public entities questioned include school districts, nursing homes, fire districts, waste disposal sites, and public authorities. To address such concerns, a rising tide of legislation has been deliberated in statehouses and capitols. The profession needs to be better equipped to limit the risk of fraud in these entities and maintain the public trust when it comes to the use of taxpayers‘ money. Taxpayers should not be taking risks when they pay their taxes. As the financial world evolves in a borderless, technologically advanced era, effective regulation of the profession through an interstate compact and the implementation of accounting academies would better serve and protect the public. Our nation‘s physical borders are no longer the only borders that require well-prepared and well-educated sentries.