Financial discrepancies are going to occur, intentional or not, it is important to report and correct the inaccuracy as soon as it is discovered. Checks and balances are in place to prevent discrepancies, but there are times when they can be missed and reported on the financial statements. Employees, investors and creditors trust that a business will be transparent and honest about their financial obligations. If you discover a discrepancy be sure you report it to management so it can be decided how the correction will be made. Most discrepancies are not intentional but to report or not report is a matter of ethics and can mean life or death for a business.
Financial statements are used by creditors and investors to determine the financial health or risk of a business. Think about it this way, when you visit a new doctor, you are asked to complete a new patient form that asks for your past and present medical history. This is the medical providers’ way of getting a snapshot of your overall health and/or risks.
Growth of a business is determined by its financial integrity and inaccurate statements can threaten its reputation and credibility. Discrepancies not only impact the business but there could be negative impacts on pensions, stocks, 401k plans, financial decisions, etc. To fully understand the magnitude of not correcting and reporting discrepancies one would only need to research Enron. All discrepancies do not reach this magnitude but the importance of reporting and correcting discrepancies are just as important.
Typically discrepancies are found when an account reconciliation is performed. These errors are generally corrected the following month with a correcting journal entry. However, making a correction after a financial filing is a bit more complex. The business is required to restate their financials and will have to show the correction for subsequent years.