Tax and Accounting Mistakes: Human Error Is Still the Biggest Problem

The survey was done in the US and involved 200 in-house tax and accounting professionals there. But we think the findings of the January 2015 Bloomberg BNA study, Top Tax & Accounting Mistakes That Cost Companies Millions, are applicable everywhere else, including in Asia.

Two takeaways are particularly interesting:

  • More than a quarter of the firms struggle with manual, incorrect tax data entry
  • Firms are much more likely to grapple with tax and accounting personnel hiring and retention problems than actual subject matter or rule deficiencies

New technology paired with human error is a leading cause of accounting mistakes

In CFO Innovation forums, roundtable discussions and interviews, we find that spreadsheet errors and the shortage of finance talent are almost always mentioned as challenges – and not just in the context of tax and accounting, but also analytics, forecasting and decision support.

Manual errors

“New technology paired with human error is a leading cause of accounting mistakes, with more than a quarter (27.5%) of professional reporting that incorrect data had been manually input into an enterprise system at their firms,” the researchers report.

The other mistakes cited would be familiar to CFOs and controllers here in Asia, where almost everyone owns personal communications devices and spreadsheet usage continues to be prevalent:

  • Saving files with corporate financial or tax data on personal device (18%)
  • Accidentally deleting customized formulas (17%)
  • Using figures calculated outside an enterprise program (13%)
  • Connected a device containing data to a non-secure wireless network (13%)
  • Saving sensitive financial data on cloud applications (11%)

According to the survey, “a handful of respondents also report instances of deliberately unauthorized data sharing: 6% say employees have shared corporate data with a friend or family member, and 4.5% have seen financial or tax data shared via social media.”

Regulatory missteps

Compared with manual and technology-related mistakes, fewer respondents cite regulatory missteps. Even so, a rule-based mistake can be much more costly than a manual error, particularly if it is unnoticed for years.

“Bank of America miscalculated its regulatory capital in 2009 and the error was carried over until it was noticed in September 2014, leading to a US$7.7 million fine,” the report authors note.

The most common rule-based mistake is the premature closing of the books before all the required data has been collected, which is cited by 12% of respondents. This is an error associated with financial services firms.

Other regulator-related accounting and tax mistakes include:

  • Modifying asset information from past years (10%), which tends to be associated with asset-intensive industries like manufacturing
  • Incorrectly applying unitary state tax rules (10%), which may be unique to the US given its federal system but may have echoes in China, where local governments have their own rules that are sanctioned or not sanctioned by the central government
  • Failing to track city-specific tax regulations (10%)
  • Failing to maximize depreciation because the most advantageous tables were not used (9%)

Six percent either incorrectly deducted dividends according to individual state standards or wrote off businesses that were later audited and found to still have value, the report notes. “Less frequent but still common mistakes include expensing deferred compensation before its restriction lapsed (5%) and failing to reconcile past partnership earnings estimates (4.5%).”

Talent management

Rivalling manual inputs as a key mistake, according to respondents, is their organization’s inability to recruit and retain tax personnel (19.5%). This failure almost certainly increases the likelihood of committing manual errors, inadequate oversight and misjudgment.

Other organizational shortcomings include:

  • Suffering unfavorable adjustments in audit (16%)
  • Lack of awareness by the C-suite of the tax function’s importance (11%)
  • Insufficient investment in tax systems (11%)
  • Failing to take advantage of tax breaks due to lack of available data (11%)

What is the Answer?

“If firms solved their talent acquisition and retention challenges and encouraged more executive support for tax and accounting operations,” the report writers argue, “they could find the human capital to make substantive changes in their enterprise software environment. As a result, businesses could resolve more granular technology and process-oriented errors.”

This is, of course, easier said than done, particularly in Asia, where the demand for tax and accounting expertise is ever growing while the supply of experienced talent is not keeping pace.

At- or above-market compensation packages are important, but so are training and other opportunities for professional development, which many finance professionals appreciate, particularly in developing Asia.

Developing a career path, cultivating personal ties and, increasingly, corporate social responsibility programs for the good of the community are other ways CFOs typically cite for effective talent management.  

Exploring a Shared Services structure for accounting and setting up a Center of Excellence for tax matters are also potential solutions. Asia is home to many of the world’s leading outsourcing providers, particularly in India, Malaysia and the Philippines, so a BPO solution may also be an option.  

What about getting rid of spreadsheets and directing everyone to use only automated enterprise systems? This does not seem to be necessarily a solution. As the survey finds, people do find ways to override data in an enterprise system and put in other figures instead.

“Eliminating some of these struggles hinges on better alignment of tax and accounting personnel with the technology they use,” the report suggests. “Rather than including tax and accounting professionals only during the system implementation process, they should be involved throughout the procurement and design phases to better ensure that the firm’s systems directly address the needs of its users.”

At the end of the day, though, the lesson seems to be that there is no substitute for good people who have the expertise and commitment to do their work accurately and in a timely manner – and who possess the good sense to keep data confidential and avoid uploading information on insecure wireless networks and their own personal devices.

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