Top 10 Utility Accounting Mistakes
Follow this list to help ensure your financial results are as accurate as possible.
While many items could be included, these are common areas of accounting issues we’ve observed in utilities where even small adjustments can lead to stronger financial reporting and improved processes.
1. Misclassifying Capital vs. Expense Items
Expensing capital items (like meters, transformers, or line extensions) instead of capitalizing them, or they capitalize routine maintenance. This leads to distorted operating expenses and misstated assets. Set a capitalization limit for the non-construction items and set up a work order system for construction items. Training your team will go a long way towards accuracy in accounting for projects.
2. Incorrectly Applying AFUDC (Allowance for Funds Used During Construction)
AFUDC should be applied only to qualifying construction projects. Misapplication—such as applying it to expense items or not recording it at all—misstates both interest expense and asset values.
3. Not Following FERC or RUS Uniform System of Accounts
Utilities that deviate from the prescribed chart of accounts risk inconsistent financial reporting and inaccurate rate setting. Misclassifications can also make financial results less reflective of actual operations and hinder meaningful benchmarking with peer utilities.
4. Inconsistent Capitalization Policies
If different departments apply capitalization thresholds or useful lives inconsistently, it results in uneven financial reporting, challenges in audits, and difficulty justifying costs in rate studies.
5. Misallocating Shared Services or Overhead Costs
Overhead items like IT, fleet, finance, and Human Resources should be spread across functions (power, water, sewer, etc.), using industry methods like the 3-point formula for consistency and defendability in rate cases.
Utility Accounting and Rates Specialists provides on-line/on-demand courses on operations and construction project accounting, rates, and management for new and experienced co-op and utility professionals and Board members. Click on the button to see a highlighted listing and description of our course offerings.
6. Poor Documentation of CIAC (Contributions in Aid of Construction)
When developers or customers contribute funds for utility construction, failing to track these contributions correctly can cause misstated revenue, assets, and potentially refunds to existing customers.
7. Failing to Accrue Unbilled Revenue Accurately
Utilities provide service continuously, but billing cycles cut off mid-month. Missing or poor unbilled revenue accruals understate revenues and receivables, creating rate-setting and audit issues.
8. Inadequate Tracking of Work Orders and Project Closeouts
Construction work orders left open for years distort work-in-progress balances, delay depreciation, and can mask stranded or abandoned projects that should be written off.
9. Weak Internal Controls Over Billing and Revenue Recognition
Revenue is the most material line item. Weak segregation of duties, poor system reconciliation, or lack of periodic testing often result in misstated financial results and audit adjustments.
10. Not Staying Current with GASB/FASB Pronouncements
New standards (like GASB 87 on leases, GASB 96 on subscription IT arrangements, or GASB 103 on financial reporting) significantly impact utilities. Falling behind creates compliance risk and extra audit costs.
These are just a few potential pitfalls in utility accounting. Add your favorites in the comment box and we’ll add them to the list.
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power and utility cost of service and rate studies, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.
Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@uarsconsulting.com.
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists, LLC. You should seek formal advice on this topic from your accounting or legal advisor.