Accounting Errors: Honest Mistakes Or Perpetrated By Fraud – The Good, The Bad And The Ugly

Accounting errors, whether honest in nature or consciously committed, are serious business. Errors can snowball out of proportion if not corrected immediately, costing the company economically through the preparation and publication of restatements, but also reputationally through negative press or, even worse, SEC actions. Particularly negative errors can shake the confidence of investors, devalue the company’s stocks and even jeopardize the economic viability of the firm.

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In some cases, unscrupulous activity perpetrated by bad actors within the company relies on subtle accounting dishonesty to defraud investors. These accounting sleights of hand are not the sole purview of the large publicly traded corporations; unwitting investors may feel the impact of this bad behavior in companies of all sizes. Incentives based on the company’s stock performance or bottom line results have been called out as one of the reasons senior management “bends the rules” in order to achieve targets that maximize their own personal bonuses and payouts, rather than working for the good of the entire company and therefore, the shareholders.

Gone are the days when these corporate shenanigans are dealt with soley by the Board of directors. Special counsel, committess and, in may cases, the SEC are drawn into the matter in order to demonstrate that the company, and Board, take the matter seriously and are acting in the best interest of the shareholders.

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Recently the SEC, through its actions, and Congress, through the enactment of new laws, have demonstrated zero tolerance for the bad behavior demonstrated by a few of the bad apples. However, some of these new rules are not without their critics. Many have pointed out that the majority of the good law abiding firms are feeling the sting of this overzealous pendulum swing through unfair penalties and increased costs of compliance.

Debate rages on as to what constitutes the appropriate balance between compliance and the ability for a company to focus on its core business and operations; whether penalties actually discourage fraud; and, how involved regulators should be in the day to day running of a business. In the meantime, an individual company’s efforts to stymie fraud and keep accounting errors to an absolute minimum through self-governance will ultimately prove to be the best remedy to cure the ills currently being suffered.

Currently working as a consultant for BlackRock, Lewis Daidone is a certified public accountant and specializes in investment management. Visit this blog for more information on accounting principles.