When you’re in business, you need a good accountant. After all, accounting plays a crucial role in ensuring your company’s financial health and tax compliance – and few business owners have the time or knowledge to manage the job on their own for very long.
Naturally, trust between you and your accountant is important, but what if your trust is misplaced? It’s wise to know how to spot the signs of trouble. These are three big red flags.
Inconsistent financial statements
One of the primary signs of accounting malpractice is the presence of inconsistent financial statements. Look out for unexplained discrepancies, sudden fluctuations in your financial picture or overly complex financial reports that are difficult to understand or analyze – and that your accountant is loath (or unable) to explain.
Poor internal controls
Accounting malpractice often involves circumventing or manipulating internal controls designed to prevent (or detect) fraud and mistakes. Red flags include:
- Solo access and control: When one individual has control over multiple financial functions without proper checks and balances, it increases the risk of malpractice.
- Weak review processes: Inadequate review and approval procedures for financial transactions allow for unauthorized or fraudulent activities to go unnoticed, which makes them primed for abuse.
- Inadequate recordkeeping: Poor documentation practices or missing supporting documents can indicate attempts to conceal financial irregularities.
- Too many adjustment entries: Mistakes happen, but excessive or unnecessary adjusting entries can also be a red flag indicating attempts to manipulate financial statements to meet specific objectives.
If you find that your accountant is making the kinds of simple mistakes that could be caught through an ordinary, regular review process, that’s definitely a cause for concern.
Missing or altered documents
The deliberate alteration, destruction or concealment of financial documents is a significant indicator of accounting malpractice. Keep an eye out for missing receipts, invoices, or supporting documentation. These can indicate attempts to hide unauthorized transactions or misrepresent your financial records.
It’s true that not all accounting malpractice happens due to deliberate malfeasance. A lack of ability can also lead to significant issues. Whatever the cause, however, the end result is the same: If your business has been harmed by your accountant’s mistakes, you may need to seek legal guidance about what it may take to recover your losses.