Sometimes the smallest mistake can trigger a corporate catastrophe, as WH Smith recently discovered.
An erroneous accounting entry sent the retailer’s share price tumbling by around 42 per cent, with the incident now becoming a cautionary tale for other businesses.
With that in mind, here’s what went wrong and how you can protect your business from the same fate.
What caused the WH Smith accounting error?
WH Smith overstated its profits, and the correction produced a swift collapse in investor confidence.
Analysts had been expecting roughly £140 million of profit, but the firm’s actual result was closer to £110 million.
The £30 million gap appears to have arisen from revenue being recognised in the wrong period.
Income that should have been recorded in the next financial year was booked early into the year under review.
That timing error made the company look healthier than it actually was, and once the mistake emerged, the market reacted sharply.
Worryingly, this is not an isolated type of failure.
In 2014, Tesco also made a mistake in recording supplier payments and ended up overstating profits by approximately £326 million.
That two high-profile companies, both being FTSE 100 companies at one point in time, have fallen foul of similar errors highlights how even large, experienced finance teams can be tripped up.
Smaller businesses need to realise that they are not immune to the ramifications of simple errors.
How to guard against accounting mistakes
The first and simplest line of defence is professional advice.
Many small businesses try to manage accounts internally to save costs and only discover problems when it’s too late.
Seeking external accounting expertise early can spot misclassification, incorrect cut-offs and other common accounting pitfalls before they become material.
A strong audit function is also vital.
In both the WH Smith and Tesco cases, a more thorough audit might have identified the errors sooner.
That’s why businesses below the mandatory audit threshold should seriously consider commissioning a voluntary audit, as the upfront cost is small compared with the potential fallout of a major restatement.
We also firmly believe that governance and financial literacy matter.
Business owners should understand the principles of revenue recognition and be able to ask the right questions of the team preparing the numbers.
Knowing when income and costs should be attributed to a reporting period is vital for business owners who want to take control of their company’s future.
Using the latest accounting software can often be a good way to prevent errors as, in many cases, the software will refuse to accept data recorded in the wrong place.
Software can be incorporated into a series of robust controls that you develop for your business to ensure that nothing slips through the cracks.
In order to tighten these controls, our accountants work alongside business owners and make sure that you are getting the most out of your money.
We help keep your accounts compliant, but also work to highlight the knowledge that will better serve you in the future.
No business is immune from mistakes, but professional support and regular audits make it far less likely that a single error will become a crisis.
Don’t let an accounting slip-up sink your company. Speak to our team today!