The ghost of financial blunders came back to haunt these unfortunate organizations.
Are you a financial professional who manages the accounting in your organization? Just in time for Halloween, here are several real-world and highly problematic, audit-related situations. They may scare you now, but hopefully they will also prepare you to get your operations in tip top shape for tax season!
One company that bought and sold online domains was doing so well financially that it aroused the IRS’ interest. During a long and tedious audit process, the IRS didn’t find any trouble with the company’s revenue. But it did raise a major red flag over a large number of inappropriate business write-offs, and informed the company that it owed a huge amount of money to the government.
In fact, the additional tax liability and accounting costs were equal to one third of the following year’s total revenue. The additional tax burden destroyed the company’s cash flow and in the end, sunk it completely. Ouch.
Hanger Inc., an Austin-based medical device manufacturer, recently paid up to $28 million in accounting costs after an audit revealed that the company needed to correct years of incorrect financial statements. The company was warned by the New York Stock Exchange that it was out of compliance with the exchange’s financial reporting rules, putting Hanger’s shares at risk of being delisted from the exchange.
Hanger, which develops orthotics and prosthetics and cares for patients through a network of more than 800 clinics nationwide, had to issue corrected results for five full fiscal years and multiple quarter reports to resolve what the company called “a series of accounting errors.” Among other blunders, the new reports showed that the company earned about 15 cents less per share than it had originally reported. Yikes!
Electronics giant Toshiba was recently caught up in one of the largest accounting scandals in Japan’s history thanks to an internal audit committee fiasco. Toshiba Corp president Hisao Tanaka and his two predecessors quit after investigators found that the company inflated earnings by at least $1.2 billion during the period 2009-2014. How could this happen with a capable and independent audit committee in place?
Well, at Toshiba, the audit committee was neither capable nor independent. To start, the three external members of the audit committee had zero knowledge of finance and accounting. And then, the ex-Chief Financial Officer (CFO), who was the CFO during the timeframe when accounting irregularities occurred, was the only full-time member of the audit committee – so the committee was hardly independent of management. Oops.
Let’s conclude with one that ends more optimistically. Accounting whiz Andrew Jowett was asked by his corporate office to become the CFO of the oilfield services unit as they had lost patience with the business unit to resolve its current problems. These problems included the fact that the business had had five CFOs in half as many years, the auditors had not signed off on the accounts for three years due to lack of financial controls, the unit had customized its ERP system so much that the vendor disowned the installation and was unwilling to support it, and the accounting department had 100 percent turnover.
Jowett accepted the job in Houston without ever setting foot in the city and immediately learned that his predecessor had been fired and his controller was a chronic underperformer. Fortunately, within a year but without much help from his department, he was able to restore the financial controls, get a clean audit, and report stellar results. Yay!
Want to automate and simplify your accounting processes so nothing like these frightening tales never happen to you? Check out this eBook to learn 6 quick wins for finance professionals.