Most companies use financial statements either to acquire financing or as an integral business tool. However, many companies don’t fully understand their statements.
Patrick T. Carney, CPA, a partner with Skoda Minotti, gets many questions from clients regarding accounting statements and standards.
“Financial statements should be tailored so owners or management of a business can use them to run the business,” Carney says. “It’s their scorecard. Forget about what a third party may need; you should use it to see how you are doing on a daily, weekly, monthly and annual basis.”
Smart Business spoke to Carney about financial statements and how accounting issues can affect your business.
What types of financial statements are available?
A CPA firm can issue three different reports on financial statements: a compilation, review or audit.
With a compilation, we take the client’s numbers and present them in financial statements. The report says we do not express an opinion or any assurance. It’s the lowest level of financial statement reporting.
Then there is the reviewed financial statement. A review consists of inquiry of company personnel and analytical procedures. We don’t attest to the numbers. We take more responsibility for the numbers than we would in a compilation, but we still don’t express an opinion like we would in an audit.
In an audit, we examine, on a test basis, evidence supporting the client’s numbers. This includes looking at invoices, documenting the client’s procedures and verifying information with third parties.
How do I know what type of financial statements I need?
The type of financial statement you need is dictated by the reason you need the financial statement.
The main reason private companies need financial statements is to obtain financing. The more financing they need, the increased level of assurance the banks want from a CPA. When there is a lot of money borrowed, the banks want to see audited financial statements. For a smaller amount of financing or if the company has been in business for a long time, a compilation may be enough. If it’s somewhere in the middle, a review would be fine.
The bank’s perceived risk regarding the customer will dictate the type of financial statement required.