Thoughts On Correcting Entries In Property Management Accounting

Background

Discrepancies errors and omissions are present in our accounting data. The reality is that our books are imperfect, and that's alright. A discrepancy can exist as a number of different flavors with the most represented example being the plain vanilla input error. However, I don't like the dichotomy of right vs. wrong as it pertains to accounting because often circumstances aren't so binary. Instead, I approach the recognition of a discrepancy as simply the discovery of a better truth.

For purposes of this discussion, assume all periods are within the same fiscal year. The context here is property management accounting and the periods are intended to be interpreted as months which often have a "soft close" given reporting is usually made to clients on a monthly basis. I'll touch on restatement near the end.

Best Truth

What's the deal with identifying an error as discovering a "better truth?" I take this approach because it allows us to exist on a timeline rather than a static position in time. Presumably, your "error" as we'll call it, wasn't entered erroneously. At least I hope it wasn't. If bad data-in from keystroke mistakes is a persistent problem, then perhaps an evaluation of processes and workflow is in order. Instead, I'll assume that the data, how it was entered, was believed true at the time of entry. Then at some point in time later, a more-true version of the story was discovered.

We want to tell the story of an entity's position and performance consistent with our understanding of best-truth contemporary to the given period. That is, the books at some point t_i should be presented consistent with our understanding of reality at  t_i, not the present period. If our objective is to retell past events from a current understanding, we may find ourselves in a constant battle to restate.

How do I reflect the best truth? Enter your correcting entry at the date of discovery and notate generously. Doing so will preserve your understanding of truth at the time of the discrepancy and the time of discovery.

When To Restate

There will be times when correction on a forward basis is not appropriate and you'll want to restate a prior period. There's a bit of discretion here because property management accounting isn't as structured as financial accounting or audit. The gauge of whether to make retroactive corrections and restatements will ultimately be determined by materiality. In the utilities expense example shared in my article An Evaluation On How To Post A Payment In Yardi Breeze for An Amount Different Than the Invoice, the impact was immaterial and my greatest concern was preserving controls rather than reporting quality. But when reporting quality is affected, changes are necessary.

If you missed a decimal and a $10,000 accrual is now $1,000,000, then I'd say you have a material error that needs correction. Another situation you may encounter where restatement is prudent is where the incorrect account is booked. In either of these cases, the informative quality of the historical period is reduced and restatement is likely necessary so that decision makers are properly informed.

For correcting entries that will have the effect of restatement, I locate the correcting transaction at the end of the period belonging to the original transaction rather than the original transaction's exact date. Being co-located with adjusting entries calls attention to the activity and communicates that what occurred is separate from the operating flow.

It's also worth mentioning that there can be pressure to not restate because of the uncomfortable conversations that can occur as a result. When you deliver the next period's financials to the principal, client, or whomever is your downstream user and the rolling twelve doesn't match up with the previously delivered statements, they're going to have questions. Get ahead of their concerns and disclose. Be detailed, transparent and deliberate with the disclosure even when it requires the acknowledgment of failure. Making a mistake doesn't deteriorate trust as quickly as the appearance of covering something up or hiding a mistake. Humans are fallible and a reasonable person will understand.

Final Thoughts

There's a lot of information out there on correcting entries but often the timing is omitted from those discussions. This is what prompted me to sharing my ideas on the topic. My objective is to tell the story as someone who oversees property management accounting processes is to ensure the store is told as best as possible consistent with the best-truth available at a given point in time. There are constraints to this objective, such as maintaining adequate control, informative quality, and so on. Further complicating things, these constraints can be in competition with each other. If you're able to execute on the objective and control for the constraints, you're on your way to quality reporting.