Avoid Costly Mistakes: Compliance Tips for Accounting Firms

You’ve heard the adage about the cobbler’s shoes. You may have even used this to describe how you feel as an accounting firm owner. Small business stakeholders often consider accounting daunting, and the mere mention of numbers and their implications for businesses can leave even the wisest business owners worried. The truth is that accounting firm owners are no exception. These firms handle several businesses and often have a tough time keeping up with their own books, compliance, and trends. We all know that change is the only constant for small firms, so staying on top of compliance with accounting and regulations is more necessary than ever.

It's important to remember that mistakes are a part of life, and accounting is no exception. Despite the best efforts and precautions of a team of accountants, errors can and do happen. However, it's crucial to be aware and take precautions wherever possible. Failing to do so can result in costly mistakes that affect not only the firm’s financial health but also its reputation. This is a risk we can't afford to take. Remember, you're not alone in this.

Accounting is more than just balancing the books-it's about making informed decisions that can shape the future of your business. Accurate accounting empowers you to monitor profitability, analyze trends, evaluate costs, and develop strategies for improvement. It also ensures that your firm is compliant with regulations, helping you avoid penalties and legal issues. Most importantly, accurate accounting gives you a sense of control and power over your finances, setting the stage for long-term success. In this article, we’ll delve into some of the most common accounting mistakes and provide strategies to help you avoid them.

What are some of the common mistakes firm owners tend to make in their own books?

It’s important to differentiate between mistakes and negligence. Many firm owners put the needs of their clients ahead of their own, just like the cobbler –this is where this benign neglect becomes costly. Let us delve deeper:

Mixing personal and professional transactions: For small business owners who have just started their accounting firms, it is easy to lose track of this focus area. They tend to mix personal and business finances, with the intention that they can differentiate during the year-end closing of their books. The problem is, as we often advise our clients, we often forget which one belongs to which category after so much time has passed. 

Besides creating confusion, mixing personal and business finances has serious legal implications, and substantiating legitimate business deductions can become more challenging.

Ignoring tracking of expenses: It is easy to get caught up in the day-to-day operations and forget the value of recording each expense as it occurs. We routinely recommend that our clients stay on top of recording transactions because real-time accounting provides valuable information essential to running a business and making important operational decisions. Falling behind on our own accounting makes it difficult to identify areas where costs should be cut or optimized. It undermines our profitability, tax planning opportunities, and, most importantly, our peace of mind.

Not reconciling bank and credit card statements: Reconciling our own accounts can seem tedious to firm owners. However, by avoiding account reconciliation, we risk losing track of transactions and details, which can lead to discrepancies between the books and the actual account balance. When firms ignore or postpone reconciling accounts, they also increase the likelihood of missing potential fraud and unauthorized activities. 

Ignoring tax deadlines: Putting the needs of our firms last can also result in missing important tax deadlines. We all know that this can have costly implications, such as penalties and interest, but you also must consider the cost of the time needed to address notices and bring the firm back into compliance. It can also raise red flags with taxing authorities and is especially bad for practitioners who are required to stay current with their own taxes and liabilities as part of their professional standards.

The impact of errors and negligence on your firm

The impact of the errors on the business is multifaceted. And it is not just finance that suffers; there are several angles to it. 

Compromised financial stability 

Penalties and fines: When accounting firms neglect compliance, they expose themselves to the risk of penalties and fines. The IRS can often impose heavy and strict penalties for violations like late tax return submission and reporting inaccuracies. The fines can pile up quickly, leading to unnecessary financial burdens that could have been easily avoided by staying compliant.

Legal consequences: Non-compliance invites financial troubles, but it also has legal consequences. Businesses that ignore accounting and tax regulations can face lawsuits from employees, clients, and governmental agencies. Lawsuits are expensive and can damage a firm’s reputation, often beyond repair, leading to the loss of clients and business opportunities. 

Decrease in team morale

Employee discontent: This is especially relevant when firms fail in payroll compliance. Incorrect salary deductions or delayed payment can result in a severe blow to employee morale. Unhappy employees lead to deteriorated productivity and can affect the workplace culture. When employees feel their employers do not prioritize their financial well-being, they may start looking for alternative employment. This adds to recruitment costs and loss of valuable resources.

Stress and burnout: A business's failure to comply can also stress out employees. Teams like Human Resources and Finance are tasked with rectifying non-compliance, which leads to overwhelming pressure, stress, and burnout and results in an overall negative work environment. 

Comprised operational efficiency 

Waste of time and resources: When businesses fail to keep up with accounting compliance, it also affects operations. Outdated practices and processes that are not compliant with the latest regulations can lead to wasted time and resources. Tasks take longer to complete, and team members often feel unproductive.

Missed incentives and opportunities: Compliance not only helps avoid penalties and lawsuits but it should also be seen as an opportunity to receive tax incentives that government regulations permit. Neglect in compliance often leads businesses to pay more in taxes than they should, which can cause them to struggle financially.

Best practices to help keep your firm compliant and error-free 

Leverage automation: As the field of accounting becomes more technology-driven, it is only fair to use tech and automation to your advantage. Automation avoids human errors, reduces time, and helps small accounting firms save on resources. Some of the top software that most businesses use include NetSuite, ZohoBooks, QuickBooks, Xero, and Sage. Investing in software that caters to your firm’s needs helps you stay compliant and scale the right way.

Invest in training: Accounting is a highly dynamic field, and staying updated with the latest trends and regulations is a continuous process. Learning, development, and training should be an integral part of small accounting businesses, where employees can learn about the latest regulations and compliance and make necessary adjustments in their operations.

Conduct regular audits: Regularly assessing the accounting processes helps accounting firm owners identify the gaps. Internal assessments or external audits also enable you to encourage teams to be more careful in their conduct. This is a great way to help businesses stay compliant with the latest regulations. These audits can help flag issues before they blow out of proportion.

Attend conferences: For every business, there is always a scope for improvement - in processes, use of platforms, and making compliance easy. Being a part of groups on social media platforms and attending accounting conferences, where you can be a part of such discussions, can go a long way in ensuring that you are on the right track. These conferences also help build a network, which helps you learn every day.

Consider outsourcing your own accounting: Small accounting firms can find it challenging to stay on top of compliance due to a lack of resources and time. Outsourcing partners have a team of experts who understand accounting and compliance at their best. Having them onboard, especially during critical seasons like year-end and tax, keeps your team’s stress at bay.

Avoiding Costly Mistakes in Accounting - Wrapping Up 

Accounting is a critical field. It needs a lot of carefulness. Neglecting correct accounting practices has far-reaching consequences that some of you may not even foresee. From accurate financial reporting to compliance issues and fraud risks - neglecting to choose the right practices can threaten the viability and reputation. It might be challenging to eliminate all errors, but it is in the best interest of the small accounting firms that they strive to minimize them.

Sponsored Content: This article is generously brought to you by one of our valued sponsors. Their support enables us to continue delivering expert insights and the latest industry trends to our dedicated community of accounting professionals.