What consequence can incorrect intercompany reconciliation have on financial reporting?

• A. It can simplify financial audits
• B. It can improve compliance with accounting standards
• C. It can lead to misstatements in financial results
• D. It can enhance investor confidence

Answer: (C)

Incorrect intercompany reconciliation can lead to misstatements in financial results, which is why this choice is the most accurate. When intercompany transactions are not properly reconciled, discrepancies such as unrecorded transactions, incorrect amounts, or inconsistent accounting policies between subsidiaries can emerge. These discrepancies result in the financial statements not accurately reflecting the company's true financial position, leading to errors in revenue recognition, expense allocation, and asset valuations.

When financial reports include such misstatements, it can significantly impair decision-making for stakeholders—including management, investors, and regulators—who rely on accurate financial data. This can also affect the credibility of the organization, resulting in potential regulatory scrutiny, financial penalties, or a negative impact on the company’s market reputation.

Alternative options, while positive in nature, do not relate directly to the adverse effects resulting from incorrect reconciliation. For instance, simplifying financial audits and enhancing investor confidence are benefits of proper reconciliation, while improving compliance with accounting standards is contingent upon accurate data, thus linking back to the necessity of correctness in reconciliation. However, without accurate intercompany reconciliation, misstatements remain a primary concern that undermines the integrity of financial reporting.