What can cause big accounting mistakes—and some ways to avoid them

You don’t need to follow accounting news closely to have seen the headlines: In just the last few months, accounting and reporting errors have contributed to school budget crises, enormous state government losses, and cost the San Francisco 49ers a draft pick.

They’ve also caused embarrassing corrections to earnings reports for Planet Fitness, Rivian, Mister Car Wash, and others. And there’s—don’t worry, we didn’t forget—that “typo” that briefly pushed Lyft’s share price up 67% before it crashed back down to earth, where an investor has since filed a class-action lawsuit proposal that alleges securities fraud). The other four companies also saw their shares fall after the corrections.

It’s not just a few high-profile examples: The SEC took more enforcement actions on reporting, auditing, and accounting last year than 2022; they took more that year than in 2021. Glass Lewis found a 150% increase in accounting errors and misstatements in the 2023 proxy season. Even auditors are making more mistakes, according to a 2023 PCAOB report that found deficiencies in 40% of audits by audit firms inspected in 2022, up from 34% in 2021 and 29% in 2020.

Before anyone gets a little swell of superiority in their chest, consider a survey Gartner published in February. It found that 59% of accountants screw up at least several times a month. A sizable minority—1 in 3—admitted to several errors a week. The bravest 18% of respondents admitted making mistakes at least once a day.

What to do? Preventing these errors all comes down to internal controls, according to Rich Brady, the Institute of Management Accountants board chair and the president of the American Society of Military Comptrollers. Companies should be segregating expense approval, payment processing, reconciling accounts, and other tasks among different staff members, he said, and restricting access to systems and data for unrelated staff, he told CFO Brew via email.

“Strict authorization protocols and regular internal audits” will help them catch anything amiss, he said. The potential consequences for skipping out will be familiar from the beginning of this article: “Unreliable financial reports,” “regulatory compliance issues,” “[increased] risk of fraud.”

It’s the workload, dummy. Much of what’s driving these mistakes appears to be a lack of accountants and a surplus of work, according to Gartner and Glass Lewis. Gartner’s study cited more regulations and economic volatility while Glass Lewis noted that the work of audit committees is growing as boards take on more responsibilities for cybersecurity, ESG, and other work for disclosure and managing risk.

There’s also the effects of what the proxy advisor calls the growth in IPOs and SPACS in 2021 that created 1,500 new listings. In particular, Glass Lewis said, the SPAC surge unleashed many companies onto public markets with even less experience at public reporting than a business that had to follow the regulations of a typical IPO.

“Even excluding these cases,” it wrote, “we have nonetheless identified a spike in the number of accounting and financial reporting concerns, indicating that the scope of the problem goes beyond the SPAC and IPO boom.”

Okay, it’s also some other stuff. Workload seems not to be the only culprit. The risk for certain kinds of screw-ups is unique to a company’s “size, complexity, ownership structure, sector, and industry,” Brady wrote. A company’s risk assessment can help establish what those pitfalls might be. “Smaller companies may struggle with the resources needed to establish comprehensive controls,” he wrote, while larger ones may have trouble with making sure the controls are upheld across the enterprise.

Some companies may be at risk for errors because they have an enviable problem: They’re growing rapidly. A fast-growing company often finds that “system[s] that worked okay when you had this many employees doesn’t cut it now with this many employees, said Mark Nigrini, an associate professor of accounting at West Virginia University, who specializes in forensic accounting.

Take the example of invoices. Small, high-growth companies tend to have less cash, he said, and can fall behind on paying vendors, which in turn may resend an original invoice. Without a process for duplicate invoices, the growing company hastily catching up on accounts payable could end up paying out vendors double. “[It’s] an error that happens all the time,” Nigrini said.

Other big changes, such as layoffs, can cost a company without processes to get through them. Inexperienced employees suddenly taking over controls are less likely to catch and fix anomalies, he said. A potential error could be “not only embarrassing, but also potentially catastrophic,” Nigrini wrote in a note to CFO Brew.

What about tech? Aren’t new tools supposed to help accountants extend their capacity and avoid mistakes? The Gartner study suggests that something could be going wrong with how tools are set up. Before actually use a new tool, teams need to feel that it is easy to learn, use, customize, and consolidate everything they need in one place, but 73% of accountants said their teams were missing at least one of the four prerequisites. While that doesn’t close the door on the potential for tools, experts who spoke to CFO Brew focused their attention on something less shiny.