What are the type of errors affecting financial statements?
September 19, 2015
Financial statements should be free of errors. Error-free financial statements allow efficient decision-making and help to avoid reputational scandals and penalties. However, no one is perfect and errors still occur. In the article below, we will discuss what the most common errors in financial statements are and how to avoid them.
An accounting error is a discrepancy in financial records or reports.
US GAAP classifies accounting errors as follows:
- error of commission (a mathematical mistake),
- error of omission (a transaction is not recorded), and
- error of principle (mistakes in the application of US GAAP).
In addition, all errors may be categorized as deliberate and non-deliberate.
Posting incorrect figures or deliberately violating US GAAP is a fraudulent activity. To minimize the risk of fraud a company may consider the fraud triangle (pressure, opportunity, and rationalization). For instance, the rationalization edge can be reduced by promoting a strong sense of ethical behavior amongst employees and creating a positive work environment.
Non-deliberate mistakes take place quite often. No company is assured against them. The way out is to come across the most common mistakes, correct existing discrepancies, and try to avoid making them in the future.
Notably, some errors are material for the company’s financial statements and some are not, which is particularly important for posting adjustments at a year-end or correcting previously issued financial statements. For instance, there may not be a need to correct an immaterial mistake in the previously issued financial statements. However, material errors would need to be corrected in financial statements.