Tips for Identifying Common Accounting Mistakes
Reviewing financial statements is crucial for lenders and investors as you won’t have access to your businesses’ day-to-day financial activities. For one, it helps you assess the health of the business; it also provides a transparent view of its operations. Additionally, it lets you compare company performance with others in the industry. This way, you can make better informed decisions and come up with contingency plans to help protect both your institution and borrower. When reviewing financial statements, you have to be thorough to get the full picture. Plus, it’s the best time for you to raise questions and spot common mistakes and anomalies like the following:
Inconsistencies with Industry Trends
When a business’s activities don’t correspond with what’s happening to its industry peers, it could be a red flag. At first glance, a company may have done everything by the book: They employ depreciation methods and have estimates of assets’ useful life. But if they use a depreciation method other than those under the Generally Accepted Accounting Principles (GAAP), that could be an issue. In this case, a business may be inflating an asset’s net worth by deliberately using adjusted depreciation methods — or they could be misreporting cash flow.
Complex Third-Party Transactions
Third-party transactions can get complicated, their benefit to the business may be very roundabout and indirect. But no matter how complex these transactions may be, businesses must be able to show third-party transactions' tangible value in their financial statements. Take time to understand these transactions since they could be used to conceal balance sheet debt.
Be wary of the sudden replacement of auditors or management structures. Companies could cite these as reasons behind missing or incomplete paperwork. As lenders and investors, having gaps in the financial statements just won’t do. You need a comprehensive report, regardless of personnel changes.
Measures and Solutions
When these anomalies happen, it’s difficult to extricate your institution from a business you’ve invested in. This is why it’s important to plan ahead and anticipate potential issues — planning is indispensable. And here are a few tips to help you stay on top of things:
Use Technology and Analytics
With a robust data foundation, technology and modern analytics will guide you towards the most accurate figures. They also let you automate tedious tasks such as checking balances and creating comparative analyses on financial activities. This has made careers in data analytics some of the fastest-growing jobs in the U.S. In fact, statistics show that the field is rapidly expanding with a 33% projected growth between 2016 and 2026. And rightly so, as data analysts work with large data sets, they’re able to spot patterns and develop insights and recommendations for many financial organizations. This lessens human error and drives better outcomes. Furthermore, you can use analytics to help you create hyper-personalized strategies for each business client to help them achieve the best financial results.
You can use industry standards or the company’s base years’ figures as benchmarks. Having a point of reference lets you monitor significant deviations and differences from expected outcomes. Benchmarks also give you a good overview of what normal business activities would look like in a given time period. Huge fluctuations from these benchmarks should automatically demand a deeper look.
You share the same objective as your business clients: growth. But it’s only through transparency and accurate financial planning that you can help them reach their goals.
Content intended only for the use of bakerhill.com
Written by Alicia Hudson
Posted on Tuesday, May 4, 2021 at 1:00 PM
by Baker Hill