Making Mistakes

I read today about the $4 billion accounting mistake made by Bank of America. That’s huge. Unfortunately, I’m not too surprised about the mistake – maybe at the size and how long it has been going on – but not the fact a mistake has been made. The article also mentioned that folks were questioning about the quality of BOA’s accountants. But…every company has problem with low quality accountants. Some will be good but quite a few (enough) will be bad.

I always thought it was scary at the large number of mistakes made in accounting. Larger companies can get away with these mistakes because the mistakes are generally are small – rarely at the $4 billion level (or maybe they are not rare and we just don’t know about it.)

Here are some of the mistakes I have seen:

– In order to make pipeline inventory reconcile between two companies, the accountant used both companies’ calculated shipping/receiving quantity rather than determine which company’s calculation is correct. In other words, the accountant used company A’s shipment of 40 barrels and company B’s receipt of 50 barrels to make a grand total shipment of 90 barrels between the two companies. So both companies would show 90 barrels but that’s not the correct shipment. This kind of reconciliation was done many times by said accountant – it was not a fluky one time mistake.

– A guy booked revenue based upon the forecast provided to him the prior month. Say somebody forecasted his cost to be $10,000 and his revenue would include a 20% markup on cost making forecasted revenue to be $12,000.  Now the month end rolls around and the true cost ends up being $8K. But instead of booking $9.6K in revenue, he books $12K in revenue. Unfortunately, I had to do some investigation and I saw this potential error. I asked him about it and he told me, cc’ing upper management, that he booked the revenue based upon last month’s forecast given him. I thought, “Okay, you just hung yourself if you can’t recognize the error of your revenue booking.” And he wanted to be division finance manager.

– One of my bosses once booked a $500K+ in revenues based upon the agreed upon monthly contract value. Unfortunately, the contract stipulated that we could bill revenue at cost spent plus a specified markup fee only if we spent it. We didn’t spend the $500K in expenses, although we could, if we could find the appropriate things to buy. I told her that we could not book the $500K+ revenue because we didn’t spend $500K in costs. She said we had an agreement with the customer for that budget amount.

– A guy used incorrect bill rates in the company’s software system that accounting used to calculate revenue during close. Despite the fact that he was supposed to cross check the invoices against his system and despite the fact that he signed a financial document stating that the system is correct, he left in the incorrect bill rates. Eventually, when the accountants reconciled the invoices against the revenue booked, the discrepancy was found and a write down of $500K (maybe $1 million) was done. Today he is a finance manager at another company.

– At a company that I had just joined, I was reviewing the revenue booked and the invoices to get the lay of the land. I couldn’t match any booked revenue to the invoices. I was able to arrive at the invoice amount but I couldn’t figure out the revenue calculation. Feeling stupid, I asked my boss. He grinned and said that I had found the deep dark secrets of the company. Apparently, the CFO insists on booking revenue at cost plus 30%, no matter what the contract agreement says.

So, it’s way too easy to make mistakes. Sometimes the mistakes are deliberate (and thus unethical and illegal), and sometimes the person is ignorant. And there are other mistakes called spreadsheet errors which can be hard to catch. The spreadsheet errors can be math or logic errors. Or, it could be something simple as the sum formula not adjusting when you add a row. Spreadsheet errors can be devious.

And spreadsheet errors will be Friday’s topic because I am running out of time.