Keeping up with technology and regulatory changes are significant concerns of 51% and 24%, respectively, of CPA and accounting firm survey participants, according to Accounting Today’s survey, The Year Ahead: 2022 in Numbers.
Delays in advanced software technology adoption and failures in regulatory compliance can lead to accounting challenges and problems for businesses. These accounting issues include errors in financial statements, fraud and security risks, and the potential for massive fines and imprisonment for regulatory non-compliance.
Trained business finance teams using advanced software technology that also automates regulatory compliance can overcome typical (and new) accounting problems.
What are Accounting Problems?
Accounting problems are issues resulting in material financial statement errors, undetected fraud due to inadequate internal control, misapplication of generally accepted accounting principles (GAAP accounting standards), regulatory noncompliance, and cybersecurity risks. Accounting problems may have unfavorable cash flow impacts and misstate business profitability.
What Causes Accounting Problems?
Some accounting problems are caused by using outdated software technology for accounting. Intentional fraud due to greed and poor internal control causes other financial issues. Low staffing levels can cause accounting problems. Not training the financial team causes accounting problems related to improperly applying GAAP.
The business must defend itself against cybersecurity attacks and stay up-to-date on changing regulatory compliance issues.
How do Businesses Solve Accounting Problems?
Financial professionals in businesses should use software with advanced technology capable of handling current accounting standards, including revenue recognition and lease accounting, and regulatory requirements to avoid or solve significant accounting problems.
Requiring CPA employees and accountants to take relevant continuing education courses regularly can also help businesses solve accounting problems. Adequate staffing levels help accountants solve accounting issues.
Top management must communicate an ethical tone, corporate values, employee empowerment, and key expectations.
11 Common Accounting Problems
In its fiscal year 2021, the SEC received 1,913 whistleblower complaints relating to corporate disclosures and financials, signaling possible accounting problems in these publicly-held businesses. The SEC also received whistleblower complaints related to the Foreign Corrupt Practices Act.
11 common accounting problems are:
- Revenue recognition
- Lease accounting
- Missing impairment write-downs
- Payroll errors
- Cash flow statement
- Outdated accounting software technology
- Not enough financial analysis
- Inadequate internal control
- Regulatory non-compliance
- Inadequate security
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1. Revenue Recognition
Improperly applying GAAP revenue recognition standards, creating fraudulent revenue schemes, including improper accounting for consignments and third-party inventory shipments beyond the level of possible usage, and using unreasonable estimates, are revenue recognition problems.
CFODive published an article on August 20, 2020 (based on an Accounting Today analysis) titled Improper revenue recognition tops SEC fraud cases. This article highlights the significance of revenue recognition as an accounting problem.
Find an accounting software or ERP solution that helps your company achieve proper revenue recognition. Your accounting and finance teams need adequate training on FASB accounting standards to comply with GAAP revenue recognition. Excel spreadsheets are popular. But spreadsheets are error-prone and inefficient. If possible, seek a different software solution.
2. Lease Accounting
Changes to GAAP lease accounting standards require lessee companies to capitalize their operating leases with tenant right of use (ROU) and a term of over twelve months. Shorter operating leases (including office space leases) can still be recorded monthly as rent expenses. The leases are amortized over time.
Accounting standards are codified by the Financial Accounting Standards Board (FASB). Accountants must also follow other changes to the Lease accounting standard.
Business accounting teams need adequate training to follow the latest GAAP standards on Lease accounting. And they will benefit greatly by using specialized lease accounting software.
3. Impairment Write-downs and Fair Market Valuation
Accountants may miss making impairment write-downs or required adjustments for recording required assets or liabilities at a fair market valuation.
Changing economic and business conditions require accountants to periodically assess whether asset valuations have been impaired (to recognize the loss of value). Accountants must also consider adjustments to the fair value of certain assets and liabilities. Accounting professionals make adjustments through journal entries and financial statement disclosures when GAAP requires.
Supply chain backlogs and economic conditions resulting from the COVID-19 pandemic triggered accounting issues to watch for, including impairment and fair value accounting, according to EY, a top-tier accounting firm.
Examples of asset impairment include:
- Assessing goodwill from M&A transactions annually for impairment
- Considering capitalized lease asset impairment
- Recording inventory at the lower of cost or market (LCM), where market value is constrained by an upper range not exceeding net realizable value and a lower range of net realizable value less a normal profit margin.
Examples of fair market valuation include:
- Trading securities (debt and equity) held as short-term investments; gains or losses on trading securities flow to Net Income on the income statement
- Available-for-sale securities (debt and equity) held as investments to be sold before maturity; net gains or losses are included in Shareholders’ Equity as Other Comprehensive Income (Loss), listed below Retained Earnings
- Liabilities measured under ASC 820 Fair Value Measurements and Disclosures
Accountants must have adequate training to properly record asset impairments and fair market valuation when required by GAAP and make necessary financial statement disclosures. Research financial statement areas subject to accounting issues with impairment.
4. Payroll Errors
If a small business decides to calculate its own payroll, payroll taxes, and benefits, it’s possible that payment errors and accounting problems will occur. Payroll problems like miscalculating paychecks for salary expenses and hourly wages hurt employee morale and productivity.
Outsource payroll to a very experienced company providing those services, like ADP or Paychex. If the right number of hours and payroll information is provided, payments and taxes withheld should be correctly computed and compliant with tax laws. You can expect accurate reports to account for those items. Your business can make payroll tax remittances on time when due.
5. Cash Flow Statement
The cash flow statement may include errors in classification by activity type and may not include restricted cash, a newer GAAP requirement.
Cash flow statement classification errors may include misclassifying the type of activity for interest and dividends received and paid. Interest received and paid is an operating activity in the cash flow statement. Dividends received are an operating activity, and dividends paid are a financing activity in the cash flow statement.
The CPA firm, RSM, summarizes U.S. GAAP (vs IFRS) classification for certain items in the cash flow statement, including interest and dividends and restricted cash.
Cash flow statement problem solving requires keeping up to date with FASB updates and training topics related to cash flow statement preparation to understand the basics.
6. Outdated Accounting Software Technology
Outdated accounting software technology isn’t efficient, doesn’t provide real-time results for visibility in managing the company or its sales & marketing processes, relies on manual data entry and paper documents for business transaction processing and recording, and doesn’t automate regulatory compliance.
Outdated ERP systems may not be cloud-based. On-premises software systems cause inefficiencies in accessing the software and require more IT department resources to update the system and address software and hardware problems at the company’s location. These ERP systems not deployed on the cloud aren’t ideal for the changed reality of remote or hybrid work situations.
Upgrade outdated software technology in accounting software or ERP systems by changing to modern cloud-based software. If you don’t have the budget for an ERP system overhaul, consider integrating third-party add-on software to meet your needs for:
- AP automation and global mass payments software, also automating regulatory compliance
- Subscription billing (applicable to a SaaS, publishing, or utilities business model)
- Forecasting, planning, and cash management software
- Customer relationship management (CRM) software to increase efficiency and better track the sales and marketing process
- Lease accounting specialty software
- Revenue recognition software functionality, if not included in your ERP
- Data visualization software for data analytics and business intelligence
7. Not Enough Financial Analysis
An accounting team without efficient accounting systems is spending too much time closing the books, leaving less time for value-added work. Financial analysis adds value by calculating ratios, spotting and managing business trends, and providing decision support for new opportunities.
Use enhanced cloud-based ERP systems and third-party add-on software with built-in artificial intelligence/machine learning that automates accounting processes and financial analysis to the extent possible. You need real-time dashboards with your company’s KPIs (key performance indicators), including trend analysis that all functional areas with authorization privileges can access.
Supplement these systems with data visualization software like Tableau or Microsoft Power BI for data analytics with real-time capabilities and periodic automated report runs for data your company follows as timeline trends. Data visualization software embeds machine learning tools to deliver business intelligence.
8. Inadequate Internal Control
Small businesses may not have enough staffing to attain the separation of duties needed for adequate internal control. Their accounting systems may be inadequate to prevent fraud and duplicate payment errors.
When segregation of duties isn’t being achieved, get the business owner involved in the approval process as a matched vendor invoice document reviewer and second signature.
The finance and accounting department needs the human capital and software resources required to perform its duties and achieve results. Is the accounting department getting its fair share of company resources?
Custody of Assets
Custody of assets includes recorded balance sheet assets and assets not yet recorded in the books like undeposited cash.
Inventory needs controls for proper receiving, custody, secured storage with controlled access, and physical inventory in full annually and via periodic cycle counts. Office equipment should also be tagged upon receipt and subject to a physical inventory. As stated earlier, inventory should be tested for any loss in value requiring a write-down.
Discrepancies in the balance of fixed assets may result from a physical fixed asset count. Set a proper cutoff for recording fixed asset purchases.
If a fixed asset isn’t recorded, look for the purchase documents and invoice to record it. If another fixed asset isn’t counted, investigate where it may be or if it was sold. For accounting purposes, record the difference between the book value of fixed assets net of accumulated depreciation and sale proceeds, computing gain or loss on the sale of fixed assets. Write off missing fixed assets if necessary after your investigation.
Fraud, including embezzlement, may result from inadequate internal control and employee collusion.
Use modern cloud-based automation software that helps you find fraud and errors like duplicate payments. Use variance analysis and followup on significant differences for budget vs actual expenses. Review vendor master files, perform 3-way document matching for invoices, and validate vendors for authenticity before paying them.
Strive to achieve adequate segregation of duties with employee task assignments. Control or custody of assets and recording transactions in the books need to be performed by different employees.
10. Regulatory Non-Compliance
Regulatory compliance covers different areas, including taxation, data privacy and security, sanctions lists like OFAC, and the Foreign Corrupt Practices Act (FCPA).
The Foreign Corrupt Practices Act covers not making bribes in foreign countries. And the FCPA’s scope goes far beyond preventing bribes.
Violations of the Foreign Corrupt Practices Act and other regulations could result in:
- Massive fines for companies and convicted individuals
- Tarnishing a company’s and convicted individual’s business reputation and ethics
Familiarize your company, including the financial and accounting staff, with regulatory issues applying to your industry and company. Perform a project to document regulatory concerns and distribute the results widely. Hold a training session for company employees. Emphasize company values that include being ethical and empowering employees to act as the “conscience of the company.”
Find an automation software solution handling regulatory compliance. Tipalti AP automation software includes automated regulatory compliance features.
11. Inadequate Security
Cybersecurity is a significant issue that can compromise business intellectual property and customer data and employee records in your system.
Implement the most advanced cybersecurity software. Create and distribute an up-to-date company policy on required steps for achieving adequate cybersecurity. Train employees on how to avoid email and other scans that can result in hacks compromising company security.
Using Automation to Solve Accounting Problems
You can solve some accounting problems and become more efficient by applying accounting automation software. AP automation will provide significant benefits for your business.
Accounting Automation Software Applications
Businesses can deploy accounting automation in several areas to improve accounting processes and results. Accounting systems automation includes efficient financial technology (FinTech) applied to vendor invoice processing and payments and customer billing and accounts receivable.
Automate subscription billing, if applicable to your business model. Use automated customer credit decision solutions to decide which customers will be offered accounts receivable instead of requiring cash payments upfront.
Integrate CRM and marketing automation software like Salesforce and Marketo to improve sales & marketing processes and convert more new customers.
Automate forecasting, budgeting, business planning, and cash flow management.
AP Automation Software Benefits
Gain time to perform financial analysis by closing the books sooner. You can accomplish this by automating routine accounting processes like accounts payable and global mass payments with add-on AP automation software accessed via ERP integration.
Automated systems provide outsized benefits in the areas of payables automation and global mass payments to suppliers, vendors, and payouts to independent contractors, including freelancers and affiliates, and royalty recipients. Automated systems improve cash flow. They increase efficiency to let your company process vendor invoices and pay in time to take lucrative early payment discounts.
The best add-on AP automation and global mass payments software:
- Automates supplier onboarding and tax compliance
- Scans with OCR technology or uploads invoices and supporting documents electronically
- Improves your company’s expense management
- Makes efficient batch payments using a choice of payment methods
- Automates payments reconciliation and adds more accounts payable reports
- Lets your company close its books faster during the accounting cycle
- Reduces fraud and errors
- Automates regulatory compliance
Using electronic documents instead of paper-based documents:
- Ends paper-based data entry, invoice matching, and processing costs
- Creates a relevant document repository through the supplier portal
- Creates an audit trail
- Enables automatic approvals with notifications and follow-up
- Makes efficient batch payments (or single payments)
- Ends the inefficient, unsafe, and costly use of paper checks
- Automatically reconciles batch payments
The level of resources required in accounting and bookkeeping can be leveraged by efficiencies provided by AP automation software. Efficiency is improved by up to 80%. Books are closed much more quickly, letting the finance team spend more time on value-added financial analysis and decision support.
Cloud-based AP automation software using AI/ML and RPA and tools for regulatory compliance work in combination with ERP systems.
Real-time SaaS automation software and ERP systems with modern technology can prevent or solve several types of accounting problems and issues, including fraud, accounting errors related to vendor invoices and payments, GAAP compliance in financial reporting, and regulatory compliance.
And adequate training of the finance and accounting team prevents or solves accounting problems.