Unrecorded liabilities

 

Samsung Electronics has laid the blame for its exploding Galaxy Note 7 handsets on the devices’ batteries, pointing the finger at overheating caused by design and manufacturing defects. The Guardian was quoted as saying on 23 January 2017. The Guardian further reported that "At a press conference on Monday, Samsung officials said exhaustive tests on tens of thousands of devices and batteries had ruled out any problems with the device’s hardware or software."  [Read more]

 

Samsung incurred liabilities for the explosion in 2016, in terms of recalled products, and the cancellation of many sub-contracting and advertising agreements. The costs to Samsung amounted to 5 billion US, according to the Financial Times.

 

The cause giving rise to the defective goods already existed in 2015 but it was never recorded and reported as liabilities in 2015.  So the accountants performing audits were to blame for unrecorded liabilities?

 

Unstandably accounting information is lagging behind business transactions and events, and we need to point out the reason for the delay in recording and reporting the transactions. The accountant will only perform tests on the Company's accounting system. The defects leading to the incidents existed in the company but it was located elsewhere outside the accounting and financial system, and not available to the accountant at the 2015 balance sheet date. The impact of the defects on the balance sheet including goodwill was finally channelled in the business process from the design stage, through the manufacturing stage, marketing stage and finally to the accounting stage in the following financial year.

 

We conclude that : liabilities take two forms, non-accounting and accounting. To detect and report the product defects involves the specialists with engineering training;  to detect and report of accounting defects involves the accountant.

 

The accounting defects will be the failure to record the liabilities for unpaid wages or supplier's invoices for goods and services. That can be addressed by performing the cut-off tests on unpaid wages or purchases. 

 

We also conclude that the phrase search for "unrecorded liability" is not officially defined by the accounting bodies. It is better to worded as search for "non-provisions" or "un-accrued items" as the provision and accrual are well defined terminology.