5 Accounting Red Flags You Should Be Cautious Of!

By November 15, 2018December 5th, 2023No Comments
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Having reliable, timely, and systematic accounting, bookkeeping, and financial management operations contribute to the success of a business. In particular, data processing, debt collection management, payroll processing and management accounting should be done honestly and accurately. Small and medium-sized business owners should be careful when outsourcing their accounting and bookkeeping tasks since there are various aspects when dealt with carelessly, can be detrimental to the health of your business. From unnoticeable errors to note-worthy mistakes, here are Five Red Flags that should alarm you that something is wrong with your accounting and bookkeeping practices.

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Calculation Errors

Do not entrust your whole accounting process to non-accountants especially when they are not equipped with the necessary knowledge and the basic tools needed to complete the task. Often, calculation errors happen when non-accountants try to accomplish a task without understanding how the process works. They can commit unintentional typos such as accidentally switching numbers or unnecessarily rounding up decimal numbers. Aside from that, accounting errors can also come from deliberate data manipulation such as omitting certain financial transactions or crediting entries on false accounts.

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Business Deduction for Personal Expenses

Don’t get confused with personal expenses and business-related costs. Marketing and advertising expenses, equipment rentals, publication subscriptions, utility expenses and many more, are among the credited list of business expenses that can be added to total calculations. When personal expenses are accidentally or deliberately added to company expenses, this raises a red flag especially when items purchased for personal use are more than what was purchased for company use. Net Profit and Equity may be understated because invalid expenses are recorded in the books of the company.

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Undocumented Transactions

In any transaction, valid documentation such as invoices or receipts is necessary for the process to be certified. In accounting, having no valid documents or no strong traceable notes such as authenticated signatures, electronic transfers, etc. to back up a transaction is undoubtedly a red flag since most under-the-table and illegal deals are done in such a manner. Aside from that, deliberate undocumented transactions often lead to errors of omission which makes the accounting process inaccurate and the results to be unfounded.

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Non-transparency in accounting processes as well disclosing complete results raises a red flag since this can hint that the company or the accounting department is hiding something. Non-transparency can be caused by errors in the process that the accounting department does not want to be disclosed. Aside from that, non-transparency can also happen when undocumented and under-the-table transactions are deliberately omitted from company records. In both cases, non-transparency raises a red flag since dishonest practices hinder the company from achieving clean and balanced books.

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Unsteady Cash Flow

Unsteady cash flow can be a red flag especially when you know that your business is experiencing growth and therefore returns should be consistent. Unsteady cash flow can mean that full payments aren’t coming in or that financial data is not accounted for correctly. It can also be due to financial returns being allocated or transferred to undocumented and unlawful accounts which are not part of the company’s assets and liabilities. Since money is needed to finance growth and operations, unsteady cash flow can also lead to company debt. When returns are not allocated properly, the cycle of borrowing money will only continue until returns are correctly appropriated.

To avoid these red flags or to prevent them from destroying your business, hire a trained accountant that knows what he’s doing. On the other hand, you can also outsource your accounting and bookkeeping tasks to accounting firms and outsource companies with trained and professional accountants. By outsourcing these financial tasks, owners can focus on growing their business for they won’t need to hire and train new employees. There’s also no need to subscribe to various online accounting programs since most outsource accounting companies are already equipped with the necessary and certified accounting and bookkeeping tools needed for effective and complete accounting processes.

At Bureauserv, we offer Accounting, Bookkeeping and Payroll services for all small and medium-sized businesses. We have certified accountants for Perth and Australian businesses that specialises in Data Processing and Payroll Processing, Debtor Management, and Management Accounting. Our team of highly-qualified accountants can handle the full spectrum of accounting and bookkeeping tasks, help you streamline your processes and cut costs by leveraging on the advancement of cloud-based solutions like Xero Cloud Accounting, Quickbooks and MYOB.