Even digital accounting still has to be double-checked

Digital accounting, while intended to deliver efficiency and generate savings, heightens the need for businesses to analyze their accounting data in depth.

The digital transformation of the business world is unequivocally underway, with a particular impact on accounting and finance departments as the automation of a whole raft of repetitive, manual tasks generates productivity gains for them.

But these developments do not eliminate the risk of error, and the digitalization of accounting record-keeping makes appropriate checks all the more necessary.

Digital accounting, an underlying trend

Thanks to the development of new technologies, computerization is becoming inevitable to businesses, providing them with numerous tools they can use to improve their accounting procedures. Recent surveys have shown, for example, that around two-thirds of businesses are now using one or more paperless invoicing systems.

Whether involving simple document digitization or the use of optical character recognition (OCR) technologies, the level of sophistication in digital accounting can vary. With electronic data interchange (EDI), corporations can dispense with paper billing entirely, with the relevant information being sent electronically from one system to another.

Developments of this kind are increasingly encouraged by governments, as in France, where the use of e-invoicing is consequently gradually becoming compulsory for suppliers to the public sector. At the same time, regulations have determined the conditions under electronic invoices have probative value, sometimes referred to as tax-compliant electronic billing or invoicing. For businesses, this requires the use of EDI, electronic signatures or, failing either of those, putting a trustworthy audit trail in place (i.e. a set of documented controls by which the lifecycle of a transaction, from start to finish, can be verified).

While improving productivity, digitalization also generates errors

Digitalization is part of the search for improved productivity in accounting departments, cutting costs and processing times. Going paperless is consequently reckoned to save a firm 50% to 75% compared with handling paper invoices.

And yet, while it delivers many benefits to businesses, digital accounting cannot eliminate certain residual irregularities. It can even actually cause some new types of error.

This phenomenon is readily explained. By removing some of the human involvement, automation removes some of the checks people perform, and with it the opportunity to uncover mistakes as they go along. In addition, complicated software configuration imposes a degree of standardization, and exceptions to those norms can then generate errors (billing for a one-time service provision, a change by a supplier in its invoicing arrangements, etc.).

While certainly potentially carrying some tax risks for the business, such irregularities also affect the bottom line. Our experts have accordingly found that businesses waste on average from 0.01% to 0.1% of their total purchasing spend because of errors in their accounts payable. Input VAT can be overlooked by OCR for example if it is just labeled “tax” instead of “VAT” (VAT is value-added tax, a type of sales tax common in Europe, which businesses are permitted to claim back). OCR can also mistake similar characters in an invoice number, leading to supplier double payments.

The need for appropriate checks

Error-detection checks are consequently still required. Going paperless makes these checks more difficult, however. The accounts department no longer necessarily has access to physical invoices, and scanned copies might not include the entire document. Secondly, the scope of manual checks is obviously reduced because it is not humanly possible to examine all the data in an accounting system.

However, a specialist audit firm using data mining techniques can conduct a comprehensive examination of the data. Solutions exist that are fully able to examine every accounting entry made over a fiscal year. These data are usually readily available to most businesses, either through a file of accounting entries (such as the “FEC”, produced for tax purposes to meet statutory requirements in France), or an export from their ERP system.

Using this kind of data analysis, companies can take advantage of the benefits of digital accounting with complete peace of mind, while limiting the risk of irregularities.