Why accounting is a key part of every business?
Over the past few years, I have started to notice that companies increasingly view accounting as one of the less important business activities. Accounting is often seen as a tiresome but mandatory part of the business operation by many companies, however, historically, it has never been paid the attention it deserves.

I decided to show companies that, even if business accounting was not a legal requirement, companies should still want to have these departments and invest in them.

To this end, I investigated what the effect of poor accounting systems and practices were, and how these could potentially cause a dissolution of a company. I also analysed possible complications that might arise at the accounting level and how these can affect the company as a whole.

The main question to consider before proving the worth of accounting is: Can poor accounting cause the cessation of a company?

When considering this hypothesis, it is important to be aware of the possible limitations of the accounting system, which I divided into three categories:

  1. Limitation of the Enterprise resource planning (ERP) system, referring to accounting software and its possible limitations

  2. Limitation of the accounting personnel, including the qualification of human resources, HR processes, and employee fluctuation

  3. Limitation of accounting processes. This category refers to poor accounting practices, encompassing internal processes, the usage of an accounting system, and the correctness of financial statements used for managerial decisions. This includes the distribution of roles, follow-up processes, communication flows, and other important factors.

All of these limitations reduce the efficiency of the accounting system.

To prove the importance of these limitations and the impact they can have on the functioning of a business, I conducted a survey of accounting professionals to gather information regarding the accounting practices of companies, their profit, as well as other relevant KPIs.

I asked the accounting professionals to give a score on a scale of 0 to 10 regarding how efficient they thought their accounting departments are at their current company. Companies of which the departments have limitations in their ERP system reached an average of 8,1.

Companies where an accounting process limitation was identified scored an average of 6,7, while companies with accounting personnel limitations had the lowest score of efficiency with an average of 6,1. This survey highlighted the need for businesses to be aware of their own accounting limitations.

If companies are not aware of these limitations, it can result in many significant and company-wide consequences. A poorly performing accounting department can negatively impact a business’ strategy, but can also pose financial and legal risks.

The key questions that serve as a basis for the discussions are: What happens if a company does not sufficiently invest in the improvements of its accounting system? Are the consequences limited to liquidity issues and poor management decisions, or can they also include the cessation of a company?

As profit maximisation remains the main objective of every company, it is important to compare the cost a company will bear from investing in an effective accounting system to not growing or even closing down as a result of negative consequences. My research shows that the cost of investment in an improved accounting system is lower than the long-term cost of not investing in it and facing the consequences.

The analysis in this research concludes that poor accounting systems do not directly lead to the cessation of a company in all cases, but that the lack of proper accounting processes and neglecting accounting limitations could cause serious legal and financial consequences such as taxation or liquidity problems.

In the worst-case scenario, these consequences could force the company to seize its operations, which could mean the end of the company.

By Kitti Harmati,  Financial Consultant/Accounting


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