Human Errors: the Top Corporate Tax and Accounting Mistakes
Technology has taken the accounting profession to places likely never envisioned a half century ago, but it has yet to eliminate a fundamental problem: human error. The impact can be enormous. For instance, in 2013, U.S. businesses were hit with nearly $7 billion in IRS civil penalties, due mainly to incorrectly reporting business income and employment values.
The software products team at Bloomberg BNA, a provider of legal, tax, business and regulatory information, set out to explore the top mistakes plaguing corporate tax and accounting departments today. To do so, it conducted a survey of 200 in-house tax and accounting professionals, over half of them representing firms with revenue of more than $1 billion. Then it published the findings in a new white paper entitled “Top Tax & Accounting Mistakes That Cost Companies Millions.” Following is a brief summary.
Data and technology challenges
When paired with technology, human error is a leading cause of accounting mistakes. More than a quarter of professionals—27.5 percent to be exact—reported that incorrect data had been manually input into an enterprise system at their firms. Other mistakes, such as deleting customized Excel formulas (cited by 17 percent of respondents) and overriding system data with numbers calculated outside of an enterprise program (13 percent), also contributed to data entry woes.
Data security is another critical issue. Bloomberg BNA found that 18 percent of accounting and tax professionals reported that employees have saved files with corporate financial or tax data to personal devices (which are potentially unsecured), while 11 percent knew of employees saving sensitive financial data to cloud apps. Similarly, 13 percent said that employees have connected a device containing sensitive data to an unsecure wireless network.
A relatively small number of respondents reported instances of deliberately unauthorized data sharing: 6 percent said that employees had shared corporate data with a friend or family member and 4.5 percent have seen financial or tax data being shared via social media.
Accounting rule mistakes
Echoing many of the technology-driven problems cited above, the most common tax and accounting rule mistakes also involve data. Topping the list, as identified by 12 percent of respondents, is prematurely closing the books before all of the requisite data has been collected. Furthermore, nearly 10 percent said that their firms have modified asset information from prior years, which can result in problematic discrepancies later on.
Other common procedural mistakes are related to the difficulties of adhering to regulatory standards. Almost 10 percent indicated that their firm has incorrectly applied unitary state tax rules. Roughly the same figure admitted to failing to track or apply city-specific tax regulations. Because of this confusion, firms may not recognize the benefits of tax incentives. Astonishingly, 9 percent of respondents—or nearly one out of ten—failed to maximize depreciation under the most advantageous tables, while almost 7 percent have incorrectly applied Section 199 deductions. This sort of gaffe could be the difference between a 7-year and 39-year asset recovery period!
A slightly smaller amount (6 percent) either incorrectly deducted dividends according to individual state standards or wrote off business units that were subsequently audited and found to still have value. Less frequent mistakes included expensing deferred compensation before its restriction lapsed (5 percent) and failing to reconcile past partnership earnings estimates (4.5 percent).
Internal business issues
Many internal business challenges underpin the aforementioned mistakes. According to the professionals surveyed, human capital plays a major role in a firm’s tax operations. Nearly one out of five (19.5 percent) indicated that their firm has experienced an inability to recruit or retain qualified tax personnel. This has likely resulted in increased oversights and poor judgment.
Suspect business leadership
The study reported that 11 percent of the professionals cited a lack of executive awareness—and almost 10 percent pointed to a lack of executive interest—in the tax function’s purpose and impact. This behavior can certainly contribute to an insufficient investment in tax and accounting systems. Management apathy might also affect firms that make investment decisions without fully considering the tax implications.
Organizational challenges often translate into concrete deficiencies. For example, 16 percent of the tax and accounting professionals reported that their firm has suffered unfavorable adjustments during an audit, while 4 percent have faced a significant deficiency or material defect during a financial audit due to tax accounting. Even worse, 11 percent indicated that their firms have failed to take advantage of tax breaks due to the lack of available data. Also, 7 percent have grossly miscalculated the tax provision in either direction.
Bloomberg BNA concluded that the means for resolving these problems begins at the top. Fostering executive awareness and support for tax and accounting operations is critical to incorporating tax implications into significant financial decisions. At a lower level, firms must invest more time and resources into finding new ways to attract and retain talent.
To avoid risk to financial or reputational damage, Bloomberg BNA advises firms to identify weaknesses within their current accounting practices and to remedy them. With a more robust approach toward its tax and accounting operations, a business can better plan financial investments and accurately determine its tax burden.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...