Accounting is essential for businesses, and mistakes can cost them a lot. That’s why it’s essential to have skilled accountants with their CPA designation to handle the books. If you don’t do an excellent job with your accounting, you can have big trouble ahead, as the examples below show.
Hertz
In 2014, Hertz found an astounding $46 million of accounting errors in financials in 2011. The company’s accounting mistakes involved many activities, such as uncollectible fees for vehicles that were damaged and restoration results.
When the public got the word, the company’s stock plunged 10%
Bank of America
The year 2014 also was not a good year for Bank of America. The giant finance company overstated its capital available by an astounding $4 billion! The accounting errors weren’t noticed for years by the firm’s staff accountants. Even its external auditor didn’t see it.
The accounting blunder happened because of a miscalculation having to do with losses the company incurred when it bought Merrill Lynch.
Groupon
Groupon takes a lot of pride in providing customers with big savings. But they cost themselves a bundle in 2012 when the site found out it didn’t have the cash to give customers refunds. Quarterly losses were more than $22 million.
The accounting problems were discovered when federal regulators questioned its revenue that it gave back to businesses running their deals on the site. They used shady accounting methods that were probably approved by the early investors who made a bundle and left.
According to the firm’s auditors at Ernst & Young, there weren’t sufficient internal controls at Groupon. Some say it’s too bad Groupon didn’t take a $6 billion offer in 2010 to sell to Google. That way, they could’ve avoided all the accounting headaches.
Enron
Saving the best (or worst) for last, there aren’t too many financial scandals that hold a candle to Enron. The company was once thought of as one of the country’s most innovative. But things went sideways quickly when it decided to pour billions of dollars into TV, print news, insurance risk, and advertising.
Financial analysts found out that Enron was establishing business partnerships that tried to hide losses. Specifically, CEO Jeffrey Skilling hid losses with mark-to-market accounting. This method measures how valuable a security is based on the current market value rather than the book value. This can be fine when you’re trading securities, but it can be a calamity for corporations.
The company built an asset, like an electrical power plant, and would claim the theoretical profit on the books. But Enron hadn’t yet made a penny from the asset. If the asset’s income were not as much as projected, the company wouldn’t take the loss; instead, it transferred the property to a shell corporation where the loss wasn’t reported. This devious form of accounting allowed the company to shrug off unprofitable endeavors without damaging its stock price.
When word got out about what it was up to, the company went bankrupt fast. Enron suffered more than $60 billion in losses.
It got so bad that the store was made into a satirical Broadway play. Of course, people who worked for Enron probably didn’t find it particularly amusing.
Summary
A common factor in many of the many big corporate accounting blunders is that one or a tiny number of people understood how the accounting books were assembled. This makes it challenging for anyone else to conduct a proper analysis. The chances for significant errors to go unchecked rise.
Fortunately, both large and small companies can learn so much from these accounting mistakes, ensuring that they’re more stable and profitable in the future.
