What happened to WH Smith? How to protect your business from accounting errors
Sometimes small mistakes can have devastating consequences, as WH Smith recently discovered.
An accounting error caused the share value of the retailer to plunge by 42 per cent and serves as a costly reminder to other businesses to keep an eye on their financial records.
Given the devastating impact of financial mismanagement, we want to highlight why seeking professional accounting services is a vital safeguard for your business.
What caused the WH Smith accounting error?
WH Smith misreported profits, and this resulted in a domino effect that caused its value to plummet.
Due to calculations that had previously been made, financial markets had been expecting the retailer to report profits of £140 million, but the real profits were closer to £110 million.
The origin of the £30 million mistake seems to be an incorrect recording of income, with some having been logged too early.
Income that should have been logged for the next financial year was incorrectly ascribed to the financial year for which the accounts were being compiled.
This would have resulted in outside observers believing the business was doing better than expected, as that income would still be expected to appear in the next set of accounts.
This betrayal of investor confidence is what caused the share price to fall dramatically.
Disturbingly, this is not the first big business to make the same accounting error.
In 2014, Tesco also incorrectly booked payments from suppliers, resulting in the company overstating profits by £326 million.
As Tesco is a FTSE 100 company, and WH Smith used to be one, the fact that this problem afflicted them both shows how imperative it is that businesses learn from these examples.
How can you prevent accounting errors in your business?
Seeking professional advice is always the best place to start when engaging with your accounts.
Many smaller businesses attempt to file their own accounts without engaging with professional oversight, and this can be an incredibly perilous thing to do.
There is also a suggestion that in both cases that a more thorough audit could have and should have identified the error before it became problematic.
This is vitally important for any business that is below the threshold for mandatory audits, as it provides a searing example of how audits can prevent financial issues from escalating.
Fundamentally, the story reveals a greater need for businesses to understand their accounts alongside those who compile them.
As a business owner, you should come to learn when it is appropriate to record income and expenditure and to which financial year it must be ascribed.
Our expert accountants work alongside business owners like yourself to increase financial literacy so that you can understand the financial mechanisms of your business.
Only by understanding the way that money works can businesses more effectively plan for the future.
No business is inherently safe from making mistakes, so it is always best to get professional support and guidance to make the most of your finances.
Keep your business from making a costly mistake by speaking to our team today!
