‘Tis the season for year-end accounting risks

Hark the reporting deadlines sing – and with them the accompanying risk of accounting problems. ‘Tis the season for year-end accounting, annual financial reckonings, financial reporting and external audit. Mulled wine and mince pies all round? Unfortunately, this is often the time when reporting processes unveil unexpected financial results, questionable assumptions and problematic adjustments.

Accounting areas that involve judgement are at risk of error or manipulation due to the uncertainty and subjectivity involved. Increased levels of uncertainty arising from the current economic environment of geopolitical turbulence, high interest rates, and slow economic growth can cause or exacerbate instances of incorrect formulation of accounting estimates and misstated reporting. And there’s a new challenge in the mix this year in the UK: the Failure to Prevent Fraud and its underlying offences, including accounting and reporting. Examples of companies facing unwanted surprises over accounting issues abound in the public domain.

Recent headline cases involving accounting misjudgements

With the financial year-end and audit busy season fast approaching, we expect more companies will be called into question for their accounting judgements and estimates. Within days of each other in November, the US Securities and Exchange Commission (SEC) settled charges against United Parcel Service Inc. (UPS) and Macy’s Inc. and Symbotic Inc. announced reporting delays. These cases all have a common factor - misstatements related to accounting judgements:

• On 22^nd November, global shipping company UPS was fined $45 million by the SEC for improperly valuing its freight business unit. UPS materially overstated its earnings and other reported items by failing to timely record an impairment of nearly $500 million against the business’s goodwill. ^{[1], [2]}  
• On 25^th November, US retailer Macy’s Inc. announced that it was delaying its quarterly earnings release to allow for the completion of an independent investigation regarding allegations that an employee intentionally made erroneous accounting accrual entries to hide approximately $132 to $154 million of cumulative delivery expenses between 2021 and 2024. ^{[3], [4]}  
• On 27^th November, the automation technology company Symbotic announced that it was unable to file its annual report on time for the fiscal year ending September 2024 because it was completing an assessment on the financial impact of errors related to system revenue recognition. This comes after Symbotic’s announcement on 18^th November that the company restated its financial statements for the previous quarters because of errors that resulted in the acceleration of recognition of revenue and costs. ^{[5], [6], [7]}  

The complexities of accounting judgements and estimates can vary greatly depending on specific situations and industries. The accounting judgment areas outlined above – goodwill, accruals and revenue recognition – are common examples of areas where companies may fall into problems regarding material misstatements.

Here are some questions to ponder as the year-end looms:

1. Is your finance department empowered to act as a gatekeeper, protecting the company’s assets and reputation? Will it challenge and debate with sales and operations management on critical assumptions which underpin key financial reporting values?
2. Is the accounting and reporting team adequately resourced with personnel and systems? Have there been gaps and challenges during the year which may give rise to unexpected errors or omissions?
3. Are there clear reporting channels for finance (indeed any) team members to escalate questions and concerns? Have concerns which have been raised been properly addressed?
4. Are interactions with the external auditors appropriate, or are there signs of over-reliance (for accounting guidance) or avoidance of information provision?
5. Are accounting and reporting controls strong across the business, or are there potential gaps, for example, in joint-venture arrangements, foreign business units and subsidiaries?
6. Have there been any unexpected elements to the financial results – whether good or disappointing? If so, have these been probed and fully understood?
7. Have the major internal control recommendations from the external auditors been addressed? If not, has this been considered in your Failure to Prevent Fraud risk assessment?

With accounting-related enforcement actions expected to continue, get in touch for early advice or training on what to look out for to mitigate the risk of extending reporting timelines.

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