How to correct financial statements? Common mistakes and the correction procedure

What are financial statements?

Financial statements are mandatory documents prepared by entities that maintain accounting books. Their purpose is to present a company’s financial position and operating results for a given financial year.

The document is prepared as of the date of closing the accounting books, usually after the end of the financial year. In most cases, businesses are required to prepare financial statements within three months of the balance sheet date and approve them within six months of the end of the financial year.

Financial statements typically consist of a balance sheet, a profit and loss account (income statement), and supplementary notes, including an introduction to the financial statements and additional explanatory information. Depending on the type of entity, the document may also be expanded to include a cash flow statement and a statement of changes in equity.

The most common errors in financial statements

Errors in financial statements may vary in nature and materiality. Proper identification is essential, as it determines the appropriate method for correcting the financial statements.

One of the most common categories consists of accounting and bookkeeping errors. These usually arise during the recording of business transactions and result from mathematical mistakes, incorrect account coding, or the improper allocation of costs and revenues to the relevant reporting period. An example would be recording a sales invoice relating to the previous financial year in the wrong accounting period.

Another category includes substantive errors, which occur when the information contained in the financial statements does not accurately reflect the company’s actual economic situation. These errors most commonly result from an incorrect interpretation of regulations or the application of inappropriate accounting principles. An example may include the incorrect valuation of assets or liabilities, such as measuring them at selling price instead of acquisition cost.

In practice, errors involving the omission of business transactions are also common. For example, a company may receive a cost invoice that is not recorded in the accounting books and, consequently, is not included in operating expenses. Such omissions may materially affect the entity’s financial result.

How can errors be detected?

The sooner irregularities are identified, the easier it will be to correct the financial statements. In practice, businesses use several mechanisms to detect errors.

One of these is internal financial control, which includes the system of procedures applied within the company. Regular verification of documents, approval of accounting entries by authorised personnel, and monitoring the accuracy of accounting records help reduce the risk of errors.

The audit of financial statements also plays an important role. An independent review conducted by a statutory auditor helps assess the accuracy of financial data and identify irregularities before the documentation is approved. Regular audits of financial statements can significantly reduce the risk of material errors and costly corrections.

Ratio and comparative analysis can also be helpful. Sudden changes in costs, revenues, or unusual transactions may indicate accounting errors requiring additional verification.

Correction of financial statements before approval

If an error is detected before the approval of the financial statements, the course of action depends primarily on its materiality.

In the case of a material error, it is necessary to make the appropriate correcting entries in the preliminarily closed accounting books for the relevant financial year. The financial statements must then be re-prepared to reflect the correction.

An example would be a situation in which a sales invoice issued in January relates to a service provided in December of the previous year but was incorrectly assigned to the wrong reporting period.

If, however, the detected error is immaterial and was made in the financial year for which the financial statements are being prepared, it may be recognised in the accounting books of the following financial year without the need to re-prepare the document.

How to correct financial statements after approval

Many business owners wonder how to correct financial statements after they have been approved. As a general rule, an approved document is not amended.

If an error is identified after the approval of the financial statements, it should be recognised in the accounting books of the financial year in which the irregularity was detected.

Material errors are usually recognised through the profit and loss settlement account and disclosed as profit or loss from previous years (prior-period profit or loss). In contrast, immaterial errors are recorded in current expense or revenue accounts.

In certain situations, additional changes to the financial statements may also be required, such as presenting the correction in the statement of changes in equity, retrospectively restating comparative data, or disclosing relevant information in the notes to the financial statements.

An example would be the failure to recognise a liability arising from a supplier invoice relating to the previous financial year, which is discovered only after the financial statements have been approved.

Consequences of errors

Incorrect financial data may lead to a number of adverse legal and business consequences.

Serious errors in financial statements may result in liability for individuals responsible for maintaining the accounting books, as well as members of the management board. In certain cases, the consequences may include financial penalties.

Correcting financial statements may also involve additional accounting costs, the need to reanalyse documentation, or the implementation of additional control procedures.

The issue of a company’s credibility is equally important. Improperly prepared financial statements may negatively affect relationships with banks, investors, business partners, and financial institutions.

How to reduce the risk of errors

Effective prevention helps reduce the need for later corrections and increases the reliability of financial reporting.

One of the most effective solutions is the regular audit of financial statements, which enables the early identification of irregularities and ensures that documentation complies with applicable regulations.

Equally important is the training of employees responsible for accounting and finance. Regular knowledge updates help minimise the risk of misinterpreting regulations and making recording errors.

Companies should also implement effective internal control systems, which improve the security of accounting processes and enable faster detection of irregularities.

Summary

The correction of financial statements depends primarily on when the error is detected and whether it is material. The procedure differs before the approval of the document and after its formal approval.

For this reason, it is essential to regularly monitor financial data, implement control procedures, and make use of professional financial statement audits. Early detection of errors in financial statements helps avoid costly consequences and enhances a company’s credibility.