Unrecorded liabilities are not necessarily a result of poor financial management, but rather items of liability that have not yet been reported. Examples include unused vacation time and unexpected expenses. Financial audits aim to limit unrecorded liabilities.
One of the first things to understand is that unrecorded liabilities are not necessarily something that develops because a person or company has not practiced due diligence in managing financial affairs. In fact, it is normal for any business to have some degree of these responsibilities. Since an unrecorded liability is simply an item of liability that does not currently appear on a financial statement, it may be a factor that simply has not needed to be reported up to that point.
As an example, many companies provide vacation time accrual to their employees. Employees often have the ability to carry over unused vacation time from one year to the next. This can lead to a substantial amount of compensation being owed to the employee at the time the individual decides to retire. Unused vacation time does not routinely appear as an item on many company financial statements. Since the vacation time has not been used, there is no real way to account for it, until the time payment is issued. That accrued unused vacation time is a prime example of unrecorded liabilities that may be recorded at some point in the future.
Another scenario would be changes in state and federal laws that could affect the relationship between a supplier and the company. For example, a change in the laws governing telecommunications allows your long distance and conference providers to charge a new service fee retroactively to the first of the current fiscal year. Certainly this was not a previously known factor and could not be treated as a recorded liability. Instead, it would be classified as an unrecorded liability that the company would have to pay over time.
The same is true with a home budget. The budget may allow a certain fixed percentage on mortgages and credit card interest. When something happens that increases those interest rates, the result is unrecorded liabilities for home operations. That is, something that was not anticipated in the household’s budget and does not have a place on the household’s balance sheet will be treated as an unrecorded liability until the new expense is accounted for in the household’s operations.
Competent financial audit seeks to keep the number of unrecorded liabilities within a reasonable limit, primarily items that are not expected or should not be included in the financial statements until they can be accounted for in an existing classification. They should never be seen as a hindrance to problems that arise due to poor planning or resource management.
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