Schwazze (OTC:SHWZ), a Colorado-based cannabis company, announced it would restate its financial statements for FY 2022/23 and Q1-Q3 2023 to address several accounting errors.
Schwazze’s accounting issues included errors with preferred shares, operating leases and inventory valuations. Although management assured investors that key metrics like revenue and Adjusted EBITDA remained unaffected, the incident highlights how small mistakes can escalate.
In May, Schwazze replaced its auditor after the SEC flagged previous audit failures, mostly related to balance sheet reclassifications. This case underscores the importance of accurate accounting, especially in the highly scrutinized cannabis industry.
While Schwazze's issue may seem minor compared to past scandals, it serves as a reminder of how easily financial mistakes can spiral. Just consider the following infamous accounting blunders.
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(In)famous Accounting Blunders
The Fannie Mae and Freddie Mac Accounting Mistakes (2003)
In 2003, Fannie Mae and Freddie Mac, two government-sponsored entities that play a critical role in the U.S. housing market, made significant accounting errors related to the way they reported income and expenses. The mistake was linked to the incorrect application of accounting methods for hedging activities—particularly how they handled derivatives used to manage interest rate risk. Fannie Mae, in particular, miscalculated the timing of its expenses related to these derivatives, leading to an overstatement of its earnings. This error ultimately resulted in a restatement of financial results and an SEC investigation.
The London Whale Trading Loss (2012) – JPMorgan Chase
In 2012, JPMorgan Chase incurred a massive trading loss of over $6 billion, which was initially attributed to a mistake in accounting. The loss stemmed from a complex financial strategy involving credit default swaps (CDS), but a key accounting mistake was made when tracking the position in the spreadsheet used by the traders. A manual error occurred when inputting data into the spreadsheet, leading to the inaccurate reporting of the bank's exposure to risk. This error significantly overstated the bank's risk management capabilities and was not caught until it had spiraled into a huge loss.
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The Knight Capital Group Trading Glitch (2012)
Knight Capital Group, a major U.S. financial services firm, suffered a catastrophic loss of $440 million in just 45 minutes due to an accounting-related mistake in its trading software. The error occurred when the company improperly installed new software meant to improve its trading algorithms. A coding mistake triggered a massive number of erroneous trades, leading to unintended purchases and sales of stocks. This glitch, which was technically a software error but had the same impact as an accounting mistake, caused significant financial losses for Knight Capital.
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