Manufacturers obsess over efficiency, but audits often expose financial landmines that can crush profitability. Here are five risks, each backed by real-world disasters, that you can’t afford to ignore.
Inventory Valuation Errors
Nothing good lasts forever… and that includes inventory. Obsolete stock needs timely write-downs and appropriate reserves to reflect reality. Intel learned this the hard way: in 2022, it wrote off $564 million in outdated semiconductor inventory.
Improper Capitalization of Costs
When accounting staff do not properly understand capitalization standards, routine expenses, such as maintenance, can be incorrectly capitalized as fixed assets. This inflates short-term profits but leads to large impairment charges later. WorldCom’s infamous fraud hinged on capitalizing $11 billion in line costs instead of expensing them-boosting short-term profits and triggering the largest bankruptcy in U.S. history.
Revenue Recognition Issues
Revenue recognition errors can also wreak havoc. Recording revenue before shipment or before the transfer of risk overstates earnings and creates compliance risks. Sunbeam’s 1998 “bill-and-hold” scheme booked sales before shipping, inflating earnings and duping investors. The fallout? Restated financials, a stock price collapse, and prison sentences for executives.
Unrecorded Liabilities
Unrecorded liabilities are another silent profit killer. Failing to accrue for warranty claims, rebates, or penalties understates expenses and inflates profits. Toshiba overstated profits by $1.2 billion by failing to accrue warranty and project costs. The scandal shattered trust and wiped out billions in market value.
Misclassification of Operating vs. Non-Operating Costs
Cost misclassification is subtler but equally damaging. When freight and storage costs are buried in Selling, General & Administrative (SG&A) instead of cost of goods sold, gross margin figures become distorted, leading to poor pricing decisions. Many manufacturing companies mistakenly classify freight-in and storage costs under SG&A instead of Cost of Goods Sold (COGS). Under GAAP, freight-in and storage costs incurred to get goods ready for sale should be included in inventory and flow through COGS when sold. Without proper financial information, manufacturers don’t have the tool chest to make accurate and timely pricing decisions.
These examples underscore a critical point: financial audits are not just compliance exercises. They are essential tools for protecting profitability and ensuring accurate decision-making. At Boyum, our manufacturing team specializes in uncovering these hidden vulnerabilities before they spiral into financial disasters. We combine deep industry expertise with advanced audit methodologies to ensure your inventory is valued correctly, costs are classified accurately, and revenue recognition aligns with compliance standards.