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Consequences of Poor Accounting and Expense Practices

By on April 30, 2015 in Expense with 0 Comments

While accounting and expense management may not be the most glamorous aspects of running an enterprise, they are a necessary backbone of that enterprise. Poor accounting and expense management practices can quickly result in some very unpleasant consequences that could put the entire company at risk in the long run.

Expense management typically receives little fanfare, yet such expenses are actually the second largest controllable expense for most companies. You might think that as such, it would receive a lot of attention, yet that is rarely the case unless some rogue employee is discovered to have swindled a small fortune by submitting fraudulent expense reports.

Paying the Piper: Possible Criminal and Civil Penalties

Whether the problem is fraudulent expense reports or simply poor accounting practices, the consequences of such problems can be immense. Among the most significant problems that can be encountered by an organization that engages in poor accounting and expense management practices are civil and criminal penalties. In the event that your organization is a publicly traded company, you could potentially face fines as well as prison time under the Sarbanes-Oxley Act if you knowingly falsify financial information. Furthermore, investors in your company could sue your company as well as the owners for civil damages. According to a recent report released by Cornerstone Research, the number of filings of securities class actions that involved an accounting-related allegation experienced a sharp increase last year.

Needless to say, it’s important for business owners to ensure they have proper accounting practices and standards in place because failure to understand proper accounting practices is not an allowable defense if you should find yourself in trouble for fraudulent reporting. In the end, if such a case makes its way to trial, it usually comes down to whether a reasonable person would believe that the business owner or manager should have been aware of the presence of fraud. If so, this alone could be enough for the jury to take the plaintiff’s side.

Looking Beyond the Law

While the potential criminal and civil consequences of poor accounting and expense management practices are severe enough, they are not the only consequences a business might face. Business owners and managers must also consider the potential loss of reputation that can occur if word gets out that your business is operated in an unethical manner. It can be tempting to think that no one will ever find out, but that is certainly not the case. This can be particularly problematic for small businesses that operate in tightly knit communities. If it is discovered that your business does not operate in an ethical manner, suppliers and customers may become unwilling to do business with you. This could ultimately destroy your business.

Admittedly, accounting and expense management can be time-consuming and complex. To make matters worse, it seems as though rules and regulations are always changing, making it even more cumbersome for accounting professionals to keep track. Yet doing so is imperative. There is simply too much on the line not to pay careful attention to the accounting and expense management practices employed in your business.

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