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.
How often should these financial reports be prepared?
They should be prepared at least annually. Depending on circumstances, a third party may require an annual audit and a quarterly compilation or review. The quarterly review provides something that is not quite as extensive, but gives some comfort that you are going down the correct path.
What is IFRS and how will it affect my business?
While U.S. companies use generally accepted accounting procedures (GAAP), most of the rest of the world uses International Financial Reporting Standards (IFRS). There is a push especially at the public company level to make those two systems consistent. So if you are getting a report from a foreign company, you understand it just as well as a U.S. company, and vice versa.
How will these changes shake out?
At one time, a complete switch to international standards was discussed, but I think it will be more of a convergence a blend of GAAP and IFRS.
A timetable has been set for SEC companies, and although it’s at least four years away, people are starting to talk about it now because they’ll have to start recording things now to be able to report the information correctly.
The key point is how it will affect private companies. There is going to be a change in what is reported and how it gets reported. Some changes you’ll look at and say it doesn’t make sense to me, it doesn’t help me.
Will the changes be useful for private companies?
Like with all changes, people will resist. Some of the changes will be useful but some will add additional complexity with no added value to the owner of the private company. In fact, there is a movement to have separate reporting requirements for private companies.
What would be the advantages of separating financial reporting for public and private companies?
The Enron fiasco caused a shift in financial reporting, requiring more regulation in accounting and many more disclosures. Many of these disclosures are applicable to public companies, but when applied to private companies, they lose their significance.
So a private company’s financial statements have become more complex because of additional disclosures. The owner of the private company does not see how the additional complexity adds any value to their financial statements. Having separate reporting will eliminate some of this unnecessary reporting complexity.
Patrick T. Carney, CPA, is a partner with Skoda Minotti. Reach him at (440) 449-6800 or firstname.lastname@example.org.