An accounting error is a mistake made in financial accounting that is not fraudulent in nature. These innocent mistakes can be greatly reduced by using accountants who are familiar with accounting procedure and the financial position of a given individual or company. When a mistake of this type is identified, it must be corrected as soon as possible.
Some accounting errors are errors of omission, in which something is left out of an accounting statement by mistake. Many people balancing their checkbooks have noted the consequences of an error of omission when they forget to log a transaction and overdraw their accounts or cannot get their books to balance. A transaction may not be recorded or may be recorded in the wrong place, leading to an omission on an accounting statement which creates a discrepancy.
Errors of commission involve data that is recorded or calculated inaccurately. For example, an accountant might transpose numbers, add instead of subtracting, or make a similar mistake in accounting. Bad calculations were a common accounting error historically, although the use of software has greatly reduced such errors. Accounting software calculates automatically, so as long as a transaction is entered properly, there should be no math mistakes.
Finally, in an error of principle, the principles of accounting procedure are applied improperly or negligently. There are a series of standard accounting practices that people are supposed to use in handling financial accounts, and these generally accepted accounting principles (GAAP) must be followed by all accountants. Accountants who do not apply these procedures properly can create accounting errors that will result in discrepancies on financial statements.
Once an accounting error is recognized, steps are taken to identify why it has occurred. Then, the error can be corrected. It is also important to address the cause to reduce the risk of a repeat error. For example, if an accounting principle was not followed, the accountant knows to follow this principle in the future. In addition, the accountant could be held liable in the future for failing to comply with procedure.
Sometimes it is hard to distinguish between a genuine accounting error and fraud. An auditor investigating a case may come up with information that can be used to find out whether an accountant made an innocent mistake or was attempting to commit fraud. For example, an audit may find that an accountant knew about an accounting error and took no action, which would suggest that fraud may have been involved.