Business owners must keep detailed records of their finances to ensure they comply with regulatory standards and remain transparent in their dealings. However, they often encounter legal pitfalls when doing so. If they don’t avoid these pitfalls, they could wind up in court, be assessed costly penalties, or find their reputation has been harmed beyond repair. Being aware of these common pitfalls is the first step. Once the business owner is aware of them, they must find ways to avoid them.
Table of Contents
Internal Controls
Robust internal controls minimize the risk of fraud or financial misstatements. American companies must comply with the Sarbanes-Oxley Act (SOX) when it comes to these controls. Any company that fails to comply may be penalized. Companies must segregate duties and provide adequate oversight. Another priority is reconciling your accounts. A strong control environment ensures these tasks are completed. Furthermore, every company should invest in automated systems to catch anomalies as they occur to reduce the risk of any being overlooked.
Accounting Standards Compliance
Businesses must adhere to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) when recording and reporting financial transactions. Failing to do so could lead to a loss of investors and legal problems. Accounting teams must be familiar with the applicable standards, so the business owner should offer regular training sessions. They should also subscribe to industry updates to be aware of changes when they happen. Bringing in external consultants for complex transactions reduces the risk of a misstep, and business owners should document all steps to show they complied if they are audited or undergo a regulatory review.
Financial Disclosures
Inaccurate and incomplete financial disclosures can be the downfall of a business. The Securities and Exchange Commission (SEC) requires business owners to keep detailed and comprehensive financial records. Any errors, even unintentional ones, can lead to issues for the business, as it may be seen as attempting to mislead investors and stakeholders.
The company may then be investigated or fined. Regular internal reviews help ensure accuracy, and the company should undergo regular audits by an independent third party to validate its financial data. Many accounting software programs today feature built-in compliance checks to detect problems early so they can be corrected.
Confidentiality
Sensitive information must be handled correctly to prevent confidentiality breaches and insider trading. Sharing financial data that isn’t available to the public, whether intentionally or unintentionally, is against the law. Any company doing so could damage its reputation and face harsh penalties. Every company needs to have strict confidentiality policies in place and enforce them to reduce the risk of information being shared.
Furthermore, it must restrict access to sensitive information. Data encryption is one way to reduce the risk of a breach. Employees should use secure communication channels to reduce the risk of information falling into the wrong hands, and companies should also monitor employees’ trading activities to catch potential problems early.
Other Potential Issues
Tax reporting errors can be costly and lead to hefty fines. Many tax errors are due to a misunderstanding of tax codes or improper documentation of transactions. Tax professionals should be employed to help prevent these issues. Companies must also monitor and address emerging risks to prevent problems.
Financial reporting should be straightforward but this task is very complex. Companies must be proactive in ensuring all reporting is handled correctly. When it is, the risk of noncompliance decreases and organizational integrity improves.