What’s the cost of a financial reporting error? Just ask Hertz, Google, Barnes & Noble, and most recently, Tesco, to name a few.
While a restatement might be the simple answer, might seem like a solution, restatements are unfortunately never enough – what’s done is done. And the repercussions of such errors impact the future of a business.
In our recent webcast, Kevin Beckberger went over a few high profile financial reporting errors experienced in recent memory. He then went over reporting problems that have afflicted companies he’s serviced over the years. Here are a few high profile cases of financial reports gone terribly wrong:
Who: Google Inc.
Financial Reporting Error: 8-K Filing error
When: October 2012
The Story: Google’s financial printer accidentally released an incomplete version of the company’s 8-K filing in the middle of the day. This incomplete 8-K showed a 20% drop in net income.
The Result: Google’s share price immediately began to plummet, as the numbers in this report failed to meet shareholders’ expectations.
Key Learnings: Using a third party outsourcing service to handle your filing creation (XBRL) and submission introduces many challenges:
– Mishandling of release
– Dependence on 3rd party knowledge with no value-add to the organization
– Version/change management challenges including a 24-48 hour pencils down period
– Over time, becomes cost prohibitive
Financial Reporting Error: Inaccurate forecasting in a public filing
When: September 2014
The Story: Due to an accounting error, Tesco inadvertently overstated its half-year profit forecast by ~$403M USD.
The Result: Following the news of the error, Tesco’s share price dropped 11.6% in one day, wiping almost ~3.5 billion from Tesco’s value on the stock market. In the aftermath of the crisis, Tesco suspended four executives and on October 23th the chairman stepped down.
Key Learnings: The takeaways here are the importance of transparency in the Disclosure Management Cycle, the cost of operating without formal processes and internal checks and balances. Also, that accounting errors can be dramatically reduced by introducing a formal validation and workflow engine to automate and control the process.
Who: Mid-Size Telecom Company
Financial Reporting Error: Lack of confidence in both external and internal reporting cycles
The Story: Broken manual processes caused this company’s controller to doubt whether the actual results would match the final versions of both external and internal reports. When last minute Journal adjustments were posted, the changes did not always get represented in the outputs being presented to executives and filed with regulators.
The Result: Multiple report cycles where errors were discovered by the CFO during the internal board presentation and in the eleventh hour before submitting filings with the regulator.
Key Learnings: The controller had already invested in a Performance Management solution to automate the organization’s consolidations and planning cycles. In order to restore confidence in the Disclosure Management Cycle, she began the process of looking for a solution that could link back to her source data directly and bring control to the overall process.
The Moral of ALL These Stories
Financial reporting errors have immediate material consequences on an organization’s public standing and those consequences are felt long term. Not only do investors lose confidence in the organization’s future, but the very teams putting together the reports lose confidence in their processes. All in all, financial reporting errors are expensive and their ramifications often go beyond the immediately tangible.
For more on this topic and to learn about the practices you can employ that will result in best-in-class disclosures, watch the webcast: Financial Reporting Integrity: Does Your Company Measure Up?