For companies relying on manual accrual accounting, the strain on their accounting team is often the most visible pain point. However, a significant and often overlooked consequence is the burden it places on internal auditors. The risk, inefficiency, and lack of transparency inherent to manual processes directly undermines the core objectives of an internal audit. For many organizations, the reliance on spreadsheets and time-consuming manual methods for managing accruals isn’t just an operational nuisance—it’s a risk to financial statement accuracy and compliance.
The problems with manual accruals
Manual accrual processes create several challenges that complicate the auditor’s work.
1. Human error
Manual accrual processes are susceptible to human error. Simple data entry mistakes, miscalculations, or the incorrect application of accounting guidelines can easily lead to misclassifications, omissions, and inaccurate financial reporting. For internal auditors, this translates to a higher risk in the financial statements. They can no longer rely on a system to enforce consistency and accuracy, forcing them to adopt a more skeptical and painstaking approach. This heightened risk profile increases the likelihood that a misstatement—or even fraudulent activity—could go undetected amidst the sheer volume of manual entries.
2. Lack of standardization
When accounting teams rely on manual processes, often managed through a series of spreadsheets, a lack of standardization is inevitable. It is difficult for auditors to efficiently test the validity of accrual balances when faced with disparate spreadsheets and a lack of a centralized, auditable system. Tracking the approval and posting of manual journal entries becomes a convoluted process, making it challenging to confirm that proper authorization was obtained for each entry. This muddiness not only slows down the audit but also raises red flags about the organization’s overall control environment.
3. Poor audit trails
A clear audit trail is the backbone of effective internal controls. But manual processes usually lack a verifiable trail. Without this, it is difficult to pinpoint the source of discrepancies, turning what should be a straightforward review into a time-consuming forensic investigation. Auditors must dedicate an enormous amount of time to extensive manual review and reconciliation just to piece together transaction histories. Re-performing calculations and tracing the entire lifecycle of an accrual manually is a tedious and often impractical task, especially in large organizations with a high volume of transactions.
4. Increased scrutiny and review
The culmination of the above challenges—human error, lack of standardization, and poor audit trails—is increased scrutiny and review from the internal audit team. Auditors must dedicate a disproportionate amount of time to substantive testing, manually vouching and tracing individual accrual entries back to supporting documentation. This time spent on low-level, detective work is a significant drain on an internal audit team’s limited resources and could be better spent identifying emerging risks or evaluating operational controls. Ultimately, the company loses out on the proactive risk management and process improvement insights that an efficient internal audit team should provide.
The consequences of manual accrual processes
The consequences of manual accrual processes can go beyond the inconvenience of time wasted in tedious scrutiny and review. In the worst case, they pose a significant risk to an organization’s financial health. Manual accruals can lead to:
- Undetected misstatements
- Violations of key regulations like SOX
- Failure to comply with GAAP
- Financial restatements and reputational damage
These potential consequences are why internal auditors spend the time on extra review. It is their job to protect the organization from these types of risk. The pressure to find and fix these inefficiencies and risks leads to increased professional anxiety and potential burnout. But it doesn’t have to be this way.
The solution: Automated accrual accounting
Spreadsheets and clunky ERP work arounds are no longer the only way to account for accruals. Solutions like FinQuery Prepaid & Accrual accounting automate accounting while also providing instant access to a complete, unalterable record for every accrual for the internal audit team. It generates a clear audit trail from a transaction’s initiation to its final posting. This not only enhances transparency but also significantly simplifies audit procedures.
Automating accrual accounting:
- Reduces the time spent chasing documentation.
- Enhances the overall control environment.
- Gains the confidence that every accrual entry is fully substantiated with verifiable evidence.
This shift from manual to automated processes transforms accruals from a time suck for accountants and a hidden audit risk into a source of secure, efficient, and transparent financial data. It allows internal auditors to move beyond time-consuming manual reviews and focus on what truly matters: strategic analysis and mitigating risk.
Check out our on-demand webinar to see how FinQuery can save your team time and streamline accounting processes by automating your prepaid and accrued expenses.
