Human error plays key role in many financial debacles

Scholars say making mistakes is one of humanity’s defining characteristics By Karlo A. Bustos-Accountancyageinsight


Inaccurate financial results are still surprisingly common, and to an extent, ubiquitous and financial errors can be extremely expensive, especially when they lead the company to make a bad business decision or issue an improper forecast. From the 2007-2008 financial crisis until now, inaccurate or inadequate numbers have played key roles in many of the larger financial debacles:

• An internal investigation of JP Morgan Chase’s $6.2 billion trading loss in 2012, the socalled “London Whale,” revealed that the risk model used by JP Morgan’s traders “operated through a series of Excel spreadsheets, which had to be completed manually by a process of copying and pasting data from one spreadsheet to another.

• In September 2014 Tesco, the British grocer, released its third profit warning within three months when it announced that it would be £250 million pounds short of its latest profit forecast, a 23% disappointment. Tesco executives had booked income from suppliers earlier than they should, while also delaying booking their costs. The only way Tesco could have ‘delayed booking of costs’ is by not entering invoices into its accounting systems.

The persistence of human errors is puzzling in some ways; because over the past 30 years, the ability to catch mistakes has improved dramatically. Better software has made it more difficult to make a serious mistake. This capability allows companies to be proactively notified of potential problems so they can be addressed before serious harm is done. But software hasn’t completely eliminated the risk of major errors.

The question is: how are you proactively monitoring for things that circumvent the normal? Whether it’s collusion or a mistake, you must be able to catch it.

One technology that can help is continuous monitoring, which allows companies to automatically monitor all transactions – a task that cannot be undertaken using manual means. The goal is not to detect trouble but to prevent it.

The reality that all businesses face is that mistakes will never be completely eliminated. In fact, as regulatory and compliance requirements continue to become more complex and as the demand for faster access to information from all parts of the business grows, the potential for errors is arguably only going to go up. Unfortunately for CFOs, the consequences are also getting more severe.

If outdated systems and ad-hoc processes are in place, taking a proactive approach to problem identification and resolution can be difficult or even impossible. However, by using technology to automate key tasks and provide a level of oversight that is no longer possible through manual means, finance departments can not only dramatically reduce the risk of errors, but also put themselves in a position to play a more strategic role within their organizations.