Errors and mistakes in business can be costly. That’s why it is imperative to use an accountant.
According to Jeffrey Kelman, president and co-founding shareholder at Kelman Moses Seifert & Hartstein; Brandon Miller, principal at HW&Co.; and Ken Sable, owner and president of Sable Group, all in Beachwood, some business accounting errors are common.
“For individuals, the biggest accounting mistakes are not keeping records throughout the year,” Sable said. “Another one is not meeting with an accountant during the summer and doing tax planning.
"Businesses have a lot more issues. First, so many business owners don’t use any accounting software. Once you get big enough that you have multiple weekly transactions, paying for software is well worth it. Tracking expenses throughout the year and having your accountant review them at least monthly ensures minimal, if any, mistakes. Not only does it capture your income, but it saves the accountant a lot of time. And saving your accountant time means saving the client money.”
Miller said he has experienced several business accounting errors during his years as a financial professional.
“With higher-level accounting-type errors, we don’t expect our clients to know them, but it’s things like revenue recognition requirements,” he said. “And by errors, I mean people could be recording revenue incorrectly based on new standards. If they don’t understand that, we have to educate them on it.”
As for basic accounting errors, Miller said he sees things like a client’s books not reconciling to support revenue and transactions; bank reconciliation; accounts payable and receivable issues; and inventories.
Kelman noted he doesn’t find a lot of errors in his client’s books, mostly because they’re using an accountant and turning the information over to a professional.
“But if there is an error, it’s often within banking transactions like a check clearing for the wrong amount,” he said. “So, we’re going to want to examine the check and see what it should’ve been. Another issue that comes up that falls into errors is clients not giving their accountant all of the data they got from various entities for tax reporting. But what we’re supposed to do is make sure mistakes don’t happen.”
The professionals said correcting accounting errors, and how easy that is, depends on what it is.
“It depends on the nature of the error,” Kelman said. “I’m thinking of a client that I converted from being a sole proprietorship to an S corp. The IRS gave them a new ID number for the S corp. But, the payroll service continued to report under the old ID number.”
He explained the IRS came to the office saying they owed a large amount of taxes, but the individual got him on the phone and had him explain what happened. All of the money had been paid, but it was just in the wrong place, he said.
Miller said the process in fixing an accounting error depends on who is requesting the information.
“If it is a business internally saying they need to clean up the books, that is not a big deal,” he said. “But if they are reporting to a board who are seeing numbers all year and all of a sudden they’re coming to you at the end of the year with all of these issues, they could’ve been making decisions based on those errors. But once we find out what the financials are for, we try to remedy the situation. You want to make sure you’re providing a detailed analysis of why. You can’t just put an entry in to fix it – you need to have support to tie it in.”
But most errors happen when businesses try to do it all themselves. That is where an accountant should come in.
“You need a second pair of eyes to see if the books are being done correctly,” Sable noted. “The accountant needs to be involved every month to make sure everything is being accounted for properly. Once that happens, the tax season becomes cheaper, faster and easier.”