Effects of Errors on Financial Statements

A financial statement can be any of a number of documents that a company's accountants prepare for the purpose of illustrating the company's current financial situation. Like anyone else, accountants may sometimes make errors in preparing such statements. Such errors can result in various negative consequences, some of them severe.

Losses and Waste

The first and foremost reason for having financial statements is to present a clear picture of the company's position to management. Management cannot expect to be able to make effective decisions if the information upon which it bases those decisions is flawed. For instance, if accounting provides management with financial statements that have errors in them, management may make deals that place a heavier financial strain on company assets than what is wise. Similarly, such flawed information may also cause management to miss potentially lucrative opportunities under the assumption that the company cannot make the necessary investments.

Reputability

Financial statements do not just go to management: they also go to shareholders, government agencies and the general public. Errors in financial statements can cause people to lose faith in the company and its employees. Even if the company's accounting department quickly corrects flawed statements, the realization that such errors are possible may still result in people losing faith in the company. Such a loss of reputability can cause publicly traded corporations to see a drop in stock value. Other companies may see a decrease in business prospects, as potential affiliates may not want to associate with a company that has a reputation for error.

Liability

Publishing inaccurate financial statements does not only have the potential to cause the company in question to make poor managerial decisions; it can also cause other companies to make poor managerial decisions. For instance, if errors in a financial statement present a company as having a financial situation that is stronger than it actually is, other companies may decide to enter into a relationship with the company in question when they otherwise would not. If such missteps result in the other companies incurring losses, the other companies may file a civil suit to recover those losses.

Prosecution

In some cases, errors on financial statements are not errors at all, but are pieces of misinformation that some party has placed there for the purpose of manipulating a particular situation. For instance, company management may issue inaccurate financial information to artificially deflate or inflate the value of stock, taking advantage of the change to personally buy or sell stock. If government officials rule that such financial statement errors are intentional, the parties involved may face criminal prosecution resulting in fines or incarceration.

References

About the Author

Ronald Kimmons has been a professional writer and translator since 2006, with writings appearing in publications such as "Chinese Literature Today." He studied at Brigham Young University as an undergraduate, getting a Bachelor of Arts in English and a Bachelor of Arts in Chinese.