How to Check for Accounting Mistakes (#311)

In this podcast episode, we describe the three-step process for minimizing and finding mistakes in the accounting department.

Step 1: Idiot Proof Accounting Positions

Checking the work of your accounting staff is a three-step process. The first step – and pardon me for saying it this way – is to idiot proof their jobs. That means making every activity as regimented as possible. For example, a payables clerk might code a supplier invoice to the wrong account. You can fix that by going into the vendor master file and setting up a default code for that supplier. The accounting software will automatically populate the account code field with this default, so that the payables clerk doesn’t have to fill it in. Most of the time, there’s no need to override the default code.

Or as another example, create a standard list of journal entry forms for closing the books, maybe with instructions for exactly how to fill out each one. That way the accounting staff understands exactly what it needs to do, and how to do it.

And as a third example, a remittance advice that customers are supposed to send in with their payments has a bar code on it that states the invoice number. By scanning the bar code instead of manually entering the invoice number, a collections clerk will always enter the right invoice number into the system – every single time.

In all three cases, we’re just making it more difficult to screw up. And incidentally, when you find an error, the first thing you should do is consider this step, to see if there’s a more idiot-proof way to complete the underlying transaction.

I’m not saying that an accounting department is filled with idiots, because it’s not – they’re usually very well trained. The problem is that a larger business might record thousands of transactions every day, and there has to be a system in place for how to deal with all of them. Otherwise, a few stray errors are bound to creep in. And that’s why you need to treat it as an industrial process, where there’s a procedure for how to do everything.

Step 2: Train the Staff

The second step in checking the work of your accounting staff is training. The number one source of errors in the accounting department is the newest accountants – as well as any older accountants who are taking on new roles. There should be a more senior person attached to each of these people, who monitors what they’re doing. The more senior person’s job is to decide when the new person’s transaction error rate is good enough to release him or her into the wild – in a manner of speaking.

A good way to make sure that a new accountant is allowed to start handling work without an intense level of oversight is to associate any errors made by this person with the responsible senior person. When you know that your own job performance depends on the performance of a newbie, it’s quite a bit more likely that you’re going to monitor that person’s performance – and in detail. So, this step is designed to ensure that newbies are closely supervised until their error rates drop – a lot.

Step 3: Find Errors with Audits

Which – finally – brings us to the listener’s question, which was how to check the work of the accounting staff for mistakes. The first two steps that I just mentioned were to prepare the groundwork, to minimize the number of errors that might be made.

So – finding errors. Since there are thousands of transactions to sort through, and it’s massively not cost-effective to review each one, the only real solution is to audit them. That means bringing in the internal auditing department to review a selection of transactions, or doing it yourself. This does not mean that you’ll find every error out there, but as long as the sample size is large enough, there’s a good chance that you’ll find a decent sampling of the types of errors that are being made.

And yes, I would conduct the sample selections by accountant, in order to get a decent set of transactions for each person in the department. And I would definitely focus the attention of the auditors on the newest accounting staff – after all, they’re the ones most likely to make mistakes.

This does not mean that other, more senior staff are exempted from the audits. They’re not. Their work still needs to be reviewed somewhat, and if you find an error in their work, then change the procedure or give them remedial training.

And a final thought. Error checking never ends. Even the most experienced accounting department in the world will make mistakes. Someone might be having a bad day, or gets distracted. So you always have to look.

Related Courses

Lean Accounting Guidebook

New Controller Guidebook