Financial statements are periodic reports made by a business or company. Usually, this report is widely used as a basis for decision making. This is because this report contains the company’s financial situation. Making financial statements can not be done carelessly. All figures in the financial statements must be entered and calculated correctly.
However, there are times when the preparation of these financial statements contains errors. In fact, the impact of financial statements is quite large. To find out more about the explanation of the effects of financial statement errors, see the following complete description.
Causes of Financial Statement Errors
An error in the financial statements can be caused by an improper process in making the financial statements. People who make financial statements should also be people who can be trusted and have qualified abilities.
Errors in making financial statements can also be caused by other things that occur in making reports, for example the transfer of data between different systems, manual data input, data input into the offline platform, or the use of inappropriate software.
Impact of Financial Statement Errors
After knowing about the causes of financial statement errors, here are some of the effects caused by errors in the financial statements:
- There is a risk of wrong decision making
One of the financial statements used by decision makers in the company. Errors in financial statements will certainly affect this decision making process.
In addition, this can also lead to doubts about the company’s credibility. As a result, companies will find it difficult to gain the trust of donors, investors, or customers.
- Financial Statement Errors Affect Taxes, Fines, and Audits
Errors in the company’s financial statements will certainly greatly affect the tax calculation, fines to be paid, and the company’s audit process.
Data errors can cause companies to pay a certain amount of money during the audit process. Conversely, the existence of accurate financial data and complete reconciliation helps all related parties to be calm during the audit process.
- Financial Statements Used by Consultants for Analysis
Most companies now use the services of third-party consultants to do the analysis. The results of the analysis carried out by this consultant will be used as consideration in corporate decision making.
However, this consultant will certainly use the data provided by the company, including the company’s financial statements. Errors in these financial statements can cause errors in the analysis and advice provided.
- There are additional costs for the company
Errors in financial statements can also result in additional costs for the company. Excess company profits written on the financial statements can result in penalties when the audit is carried out.
In addition, a miscalculation in the depreciation of a company’s assets can lead to greater tax payments. Because of these things, financial statement errors can cause additional costs for the company.
- Gives a Bad Image to the Company
The success of a business run by a company is greatly influenced by the company’s image in the eyes of the public. People tend to prefer buying products or using services from companies that have a good image.
Companies that have errors in the financial statements and have spread to the public will have a worse image. People will assume that the company contains unprofessional people and is governed by poor management. In addition, the company will also be considered manipulating data and unethical.
- Financial Statement Errors Affect Funds Flow
Another common impact of errors on financial statements is that there is a bad influence on the flow of company funds. False financial statements cannot tell about the true financial condition of a company. Fixing this also includes difficult and very time-consuming activities.
This will also affect invoice setup and delivery. As a result, companies will receive payments longer than they should. This will certainly affect many other things, such as payment of employee salaries.
- Errors in Financial Statements Affect the Budgeting and Estimating Process
Data from the financial statements will certainly be used for the budgeting process in the following year. Errors in making financial statements can certainly cause errors in the budgeting process. In addition, estimates of company growth also depend heavily on the accuracy of the data in the financial statements.
- Errors in Financial Statements Provide False Estimates of the Company’s Financial Position
Errors in financial statements can certainly provide estimates of the company’s wrong financial position. If this is known by investors it will certainly affect the investment climate. If the company’s financial position is not stable, of course investors will hesitate to invest in the company.
The same thing applies when companies apply for loans to financial institutions. The impact, company growth and development can be hampered.
How to Avoid Mistakes in Making Financial Statements
It can be concluded that the best way that can be done is to prevent and avoid mistakes in making financial statements. Here are some ways that can be used to avoid mistakes in making company financial statements:
- Make integration between core systems
- Making financial system automation
- Make an online system so that there are data backups
- Using software that suits the business needs of the company
- Hire accountants with qualified abilities
- Avoid the manual data input process
By knowing about the effects of financial statement errors, the preparation of financial statements can be done more carefully. Thus an explanation of the effects of financial statement errors, may be useful.
