©William_Potter/iStock/Getty Images Plus
History can provide invaluable lessons for finance teams. Over the last 17 years, there has been a marked increase in the number of US companies that have had fraudulent financial filings – think Enron, WorldCom, and Tyco to name a few. While these are the most easily recalled, smaller companies – especially those that have limited processes, little centralization, and manual tasks – can be even more susceptible.
The magnitude of the losses associated with these scandals stresses the importance of recognizing financial reporting red flags. Typically, there are 3 red flags that contribute to increased risk and friction within your financial close process:
- underlying operational fraud;
- friction and weaknesses in the closing process; and
- economic distress and financial reporting fraud.
There are several factors that contribute to underlying operational fraud; the most common three include: lack of consistent processes, too many surprises, and misstatements. Similar to the first red flag, friction and weaknesses in the closing process (the second red flag) has several factors. For the sake of brevity, we will focus on the most impactful – that is, no metrics or KPIs, lack of staffing and training, and fire drills. Finally, the third red flag (economic distress and financial reporting fraud) most commonly stems from these risk factors: decreasing gross profit margin, unsteady cash flow, and rising debt-to-equity ratio.
Will your finance team be able to learn from the mistakes of the past to reduce risk and friction within your financial close process? Register now for an FEI sponsored Webinar featuring Chris Doxey on November 13, from 1-2pm CST to better understand how you can mitigate risks and improve operational efficiency within your financial close process. Attendees of this webinar will receive unique checklists, process flowcharts, and scorecards that will measure both the operational and financial reporting components of the financial close.