The Securities and Exchange Commission is on a mission — gunning for instances of accounting fraud. For the first time since 2007, the SEC’s enforcement actions against companies alleged to have cooked the books is higher than the previous year, up 46% to 99 enforcement actions.
This year’s enforcement actions could be even higher, given the release of the first cases by a new SEC task force tasked with ferreting out financial reporting misconduct. If caught within the commission’s crosshairs, the sanctions are severe — tens of millions of dollars in penalties plus the ignominy of public revelations on business prospects.
A case in point is an accounting error at a well-known REIT that forced the resignation last year of the firm’s CFO, the spigot on his $35 million annual salary turned off.
The mistake caused the REIT to overstate its adjusted funds from operations, a miscalculation that reportedly was identified but not corrected. The accounting irregularity caught the SEC’s attention, which launched an investigation, whittling away at the publicly traded firm’s shares and tarnishing its reputation.
What is interesting in the above example is that the REIT’s alleged wrongdoings might not have occurred had the accounting mistake been transparent to more individuals than the CFO, who clearly fell on his sword. While automation cannot prevent the possibility of bad actors perpetrating financial fraud, it can give senior management more visibility into what is happening in accounting — detecting mistakes before they blow up into a public scandal.
Human error being what it is, something is sure to go wrong in the manual process of validating accounts and transaction balances for compliance purposes. When a blunder occurs, accountants must manually correct them. Unfortunately, in the current war for talent, companies are increasingly unable to recruit skilled accountants, one of the “ten hardest jobs to fill” in Manpower Group’s last three annual talent shortage surveys. Consequently, current staff is pressured to do more as they execute the myriad tasks needed to close the books.
CFOs need to care more about accounting — and their accountants — for another reason. Entrusted to manage strategic business performance, they need high-quality data to develop more accurate forecasts, and know when best to seize market opportunities and evade business risks. If only accountants weren’t stuck in the trenches manually summing up the numbers to assist these goals.
While automation cannot prevent the possibility of bad actors perpetrating financial fraud, it can give senior management more visibility into what is happening in accounting — detecting mistakes before they blow up into a public scandal.
Although ERP systems take much of the drudgery out of accounting, they do not automate all financial close processes. Many tasks must still be completed manually — spreadsheet-by-spreadsheet. An ERP system will verify whether or not the accounts payables sub-ledger agrees with the accounts payables general ledger balance. It also will verify if the inventory sub-ledger agrees with the inventory general ledger balance balance. Where they come up short is validating these balances for compliance purpose.
To achieve this, accountants must manually analyze hundreds if not thousands of multi-line-item spreadsheets, an exhausting undertaking that is highly prone to error. The same spreadsheets are in use by multiple people, all adding and deleting details as time progresses. Tracking these workflows across a global business creates version control issues and worrisome questions about data integrity.
Here’s a very common scenario. Say a large, multinational organization produces a general ledger comprising 100,000 balance sheet accounts. While its ERP system can tally these accounts into a total, it does not provide the granular level of detail needed to validate the underlying numbers for an accurate close. The company’s accountants have to evaluate tens of thousands of spreadsheets, an effort challenged by the different ways these documents were created and used across the enterprise, not to mention the many accounts that were added and deleted by the various individuals who left no mark.
Another close process performed manually by accountants is the reconciliation of intercompany transactions. In global organizations, various entities produce thousands of transactions in a wide range of currencies subject to different tax treatments. Often, these entities have diverse systems and dissimilar reconciliation and settlement processes, particularly if the company has multiple ERP systems.
These various complications create the risk of disconnected transaction settlements and out-of-balance positions material to the organization’s financial statements — definitely not the best way to prevent the possibility of accounting irregularities.
Reducing the Workload
Automating these accounting tasks and others like journal entries and variance analyses takes pressure off accountants and expands visibility into accounting processes towards closing the books. This makes abundant sense for three reasons — CFOs wanting immediate visibility into enterprise performance; controllers wanting improved control over compliance and reporting; and accountants wanting to provide value-added services to the Office of Finance — making sense of the numbers instead of merely adding them up.
With fewer talented accountants to serve every company, let’s reduce the workload for those that serve. And with the SEC boosting its detection of accounting fraud through a computer program dubbed “RoboCop,” let’s ensure nothing falls through the cracks.
Therese Tucker is founder and CEO of BlackLine, provider of a cloud platform to help organizations transform their financial close processes.