Common Mistakes Businesses Make When It Comes To Accounting

What are common mistakes businesses make when it comes to accounting? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Gary Hecht, Associate Professor at the University of Illinois at Urbana–Champaign, on Quora:

One big mistake businesses make when it comes to accounting has to do with under-estimating the value and role of accounting in business. Historically, accounting has a persona that is less than flattering, and hasn’t always had a seat at the strategy table. I think that this permeates people’s view of the role of accounting – especially if their own background is somewhat distant from it. In my experience, many managers and employees look at accounting information as burdensome, as more of a monitoring mechanism (e.g., “hey, you spent more than you budgeted!”) This role is important, of course, but accounting is much broader than that.

I think of accountants as “information engineers.” I think this label is much more descriptive of what accountants do inside of organizations, specifically creating and communicating information that facilitates and influences decisions made across of the organization. Companies that realize this and adopt this perspective can transform the accounting function into something that serves, as opposed to something that is served.

Another big mistakes is overly focusing on accounting information as if it is the “final answer.” For example, a large part of the accounting discipline focuses on generally accepted accounting principles. These are incredibly important and useful because they create a consensus about how to create and communicate accounting information – which then ensures that “everyone is on the same page” in terms of what a particular term means, the way financial information reflects what it is supposed to, etc. This is especially so that those who are outside the firm get a clear view of what is going on inside the firm.

However, these principles are not always sufficient for internal decision-making. When I discuss and teach managerial accounting, I always focus on the “customized” nature of managerial accounting information, and how it is (or should be) context- or decision- specific. In addition, I always discuss the limitations of accounting information. So, to avoid mistakes, it is important for managers and employees to identify and recognize the relevance of accounting information, when it needs further customization, and/or has limitations in its applicability.