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How to Achieve Low Error Rates in Your Finance Function
December 18, 2024
Errors in the accounting and finance world can lead to dramatic consequences — enforcement actions, lawsuits, financial losses and a loss of reputation for the business. Despite this, research has found that approximately 59% of accountants make several errors per month. According to data from the Institute of Finance & Management, the average paper-based invoice has a 39% chance of containing an error. Many errors may be small, and might not cause significant consequences apart from wasting the organization’s time and resources.
However, organizations with a high error rate and a lack of adequate controls are much more susceptible to fraud and have a much higher chance of accidentally making a large financial reporting blunder that can put them under the regulatory spotlight.
In this installment of our series 6 Pillars of Top Performing Finance Functions, we will focus on how top performers keep their error rates low and provide actionable strategies you can implement to optimize your current systems.
The True Cost of Errors in Financial Processes
Financial inaccuracies can have severe repercussions for businesses, from compliance breaches to significant financial losses. The stakes are especially high in regulated industries where financial accuracy is closely scrutinized.
While regulatory penalties can be immediate, the long-term impact of inaccurate data can be equally damaging. Poor data and reporting can misinform business decisions, leading management to steer the company based on a flawed understanding of its position. Such missteps can prove disastrous, potentially jeopardizing the business’s very survival.
Even when the errors are not catastrophic by themselves, a high error rate can significantly increase how much time and resources a business will need to spend to maintain its basic finance functions. As accounting and finance teams go back to recheck and redo old work, the business suffers. Not only does this lead to direct financial losses, but it also hampers the organization’s ability to focus on planning for the future. Organizations that are bogged down in fixing old mistakes cannot respond quickly to market changes or capitalize on new opportunities.
A high error rate tends to erode trust among stakeholders, including investors, creditors and even internal departments and leaders. When financial reports are repeatedly corrected, it can cast doubt on the reliability of the company’s financial management, affecting stock prices and investor confidence. This lack of trust can extend to external partners and customers, affecting the company’s reputation and long-term partnerships.
Getting It Right The First Time
Industry benchmarks show that top-performing finance functions focus on “getting it right the first time”. What’s more, they manage to save resources while doing it. Top-performers’ finance cost as a percentage of revenue is 0.587% compared to an industry median of 0.86%. According to APQC Functional Performance Data, top performers have a rate of only 3 control violations per 1,000 employees. Medium performers have a significantly higher rate, with 18 control violations per 1,000 employees.
While “getting it right the first time” is an easy slogan, actually implementing it requires a comprehensive strategy. Transforming your finance functions into top performers will necessitate training of finance personnel, regular audits of financial processes and proactive implementation of new technology.
Leveraging Technology To Lower Error Rates
Implementing Automation
Manual data entry is one of the places where financial errors occur most commonly. If employees regularly type data into your accounting system or a spreadsheet to digitize it, the chances of typos or mistakes increase significantly. Your organization may also be wasting resources by filling up in-house team hours with such routine tasks instead of focusing them on strategic projects.
This is why automating data entry is critical for reducing error rates. Optical Character Recognition (OCR) and machine learning (ML) can be deployed to scan documents and enter data automatically into your system, minimizing manual input. This both speeds up data processing and enhances accuracy.
While automated systems can also occasionally make mistakes, error rates are usually much lower. For critical financial data, implementing double-entry verification systems will ensure that each entry is checked twice, providing an additional layer of security.
AI Enterprise Resource Planning (ERP) Systems
Modern ERP systems that integrate artificial intelligence and machine learning are transformative for financial operations. AI capabilities within ERP systems can automate complex data analyses that would typically require extensive manual effort, such as anomaly detection and predictive analytics. ERP automation can extend to multi-step financial processes such as procure-to-pay and order-to-cash, ensuring that each transaction is executed consistently and without discrepancies.
Integrating the right ERP system helps organizations synchronize data across various financial functions, keeping all entries consistent and up-to-date. Many businesses continue to rely on spreadsheets for their financial processes, which, while flexible, are prone to human error and lack robust audit trails. These traditional methods are often inadequate for handling large volumes of data and complex financial operations.
ERP systems ensure that financial data is uniform across the organization, which is essential for accurate reporting and decision-making. By automating the data collection and reporting processes, these systems eliminate the discrepancies often seen with multiple disparate systems. This way, all parts of the organization use the same data metrics and formats and management has the needed visibility to see what is going on across the organization.
Utilizing advanced ERP systems effectively reduces the administrative burden on finance teams, allowing them to focus on strategic activities rather than routine data management and error correction.
The right ERP system can also streamline the compliance and reporting process, making it easier to generate reports that meet regulatory requirements. They can be configured to produce reports that align with specific legal standards and industry practices, reducing the time and effort required for manual compliance checks. Because of their real-time data processing capabilities, ERP systems allow finance teams to provide timely and accurate financial information, improving operational management and strategic planning. AI models can help finance teams extract further relevant insights from their data lakes.
ERP systems are updated regularly for compliance with financial regulations and standards, which are continually evolving. Regular updates also ensure that the system includes the latest security measures to protect against data breaches and fraud.
Establishing Data Validation Rules
Setting up comprehensive data validation rules is a key part of ensuring financial data integrity. These rules act as the first line of defense against data errors by enforcing necessary checks before data is committed into the system. Effective validation encompasses a range of criteria, from simple checks like ensuring that numerical inputs do not contain letters, to more complex validations based on business logic, such as verifying that reported figures fall within expected ranges or align with historical data trends.
Error Detection Mechanisms
Organizations should implement mechanisms for the prompt detection and correction of errors. This involves setting up alert systems within financial software that notify finance personnel of anomalies or discrepancies as they occur. By integrating these alerts into daily operations, companies can address errors almost immediately.
This is an area where machine learning and artificial intelligence can be transformative. By leveraging AI-driven analytics, finance departments can preemptively identify potential errors before they permeate through the reporting process. AI algorithms are adept at analyzing large volumes of transactions quickly to pinpoint outliers or inconsistencies that might indicate errors or fraud.
Centralizing and Standardizing Financial Practices
Standardizing financial practices across all departments ensures consistency and reduces confusion that can lead to errors. Centralizing the financial data management team is a key part of maintaining this consistency. A centralized team can oversee data integrity and compliance across the organization and ensure that all departments adhere to the same financial protocols.
Setting Up Internal Controls and Audit Mechanisms
Robust internal controls and regular audits are critical for error prevention in finance departments. Controls such as segregation of duties, access restrictions and reconciliation procedures ensure that errors are caught and corrected early. Regular audits, both internal and external, help identify and rectify systemic issues. These audits also help in validating the effectiveness of existing controls and in identifying areas where new controls may be needed – which can happen as mid-market organizations grow and expand. Internal controls must be regularly reviewed and updated to reflect changes in financial practices, technological advancements and emerging risks.
Segregation of Duties
Organizations may want to divide responsibilities among different individuals to reduce the risk of errors and fraud. For instance, the person who authorizes transactions should not be the one responsible for recording them.
Access Restrictions
Strict access controls ensure that only authorized personnel have access to sensitive financial data and systems. This might involve role-based access controls that limit users’ actions based on their job responsibilities, effectively preventing unauthorized access and potential data breaches.
Reconciliation Procedures
Mandatory regularly scheduled reconciliations allow a business to compare datasets for inconsistencies. Regular bank reconciliations help ensure that cash records in accounting systems accurately reflect actual bank statements. This is an area where automation can help optimize workflows.
Employing automated tools for continuous reconciliation ensures all transactions are consistently monitored and matched. These tools will flag discrepancies in real-time, allowing finance teams to immediately investigate and correct errors. This was also suggested as a way to streamline your R2R processes in our first article in this series.
It’s also important to establish a clear protocol for resolving these discrepancies quickly, and recording them so that concrete steps can be taken to improve processes further.
Targeted Audits
Regular internal audits help monitor compliance with internal controls and assess their effectiveness. These audits should focus on areas known for risks, such as cash handling or financial reporting, ensuring continuous oversight. Independent external audits can provide an additional layer of oversight and should not be relied on solely to assess controls adherence.
Automated tools can streamline the auditing process, handling tasks such as transaction matching and anomaly detection. Using predictive analytics to scrutinize financial transactions can help organizations identify patterns that may indicate potential errors or fraud.
Maintaining a cycle of continuous improvement in audit processes ensures that the organization adapts to changes effectively. Organizations should create mechanisms to capture and analyze feedback from audits, allowing them to learn from past experiences and refine their audit processes and controls accordingly.
Continuous Training and Development
As you update and overhaul processes, it’s important to keep your team on the same page. Regular training sessions can help ensure that all team members are up-to-date with the latest financial policies, processes, and technologies in the organization. Development programs can reinforce the importance of accuracy and detail-oriented practices, equipping staff with the skills necessary to utilize advanced financial systems effectively and minimize errors in their day-to-day work. These sessions and programs will also work to ensure the culture of learning and continuous improvement that are key in any mid-market organization’s culture.
Final Thoughts on Eliminating Errors in Financial Processes
Errors in financial processes can have severe consequences, including financial losses, regulatory penalties and damage to your organization’s reputation. Mid-market CEOs and CFOs must prioritize optimizing accounting and finance processes to lower error rates.
Automation and AI-driven ERP systems can significantly reduce manual errors, enhance data integrity and provide real-time insights for informed decision-making. Robust internal controls and regular reconciliations can create a system of checks and balances that safeguard financial data. By focusing on eliminating errors, CEOs and CFOs not only protect their companies from potential risks but also position them for sustainable growth and competitive advantage.
If anything in this article piqued your interest as something you would like to implement at your organization but you aren’t sure where to start, or maybe it only highlighted something you already know is a challenge in your organization, let’s have a conversation about it. I help clients every day outline plans to tackle these areas and would love to be of assistance to you as well. You can complete this form and just indicate “I would like to talk with Brock about his article on eliminating errors”.
In case you missed it, here is the first article in this series, “How Streamlined Processes Save Your Mid-Market Company Millions”.
