Financial statements Featured

10:32am EDT March 30, 2006
With a struggling economy and businesses trying to maximize profit margins, the role of accountants and financial statements are becoming increasingly vital.

Business owners are not always sure why it is so important that they communicate with their accountants on services both used and offered.

“Recently, a number of our clients have negotiated with the bank for a lesser level of service,” says Jim Koepke, director of accounting and auditing for Doeren Mayhew LLC. “They’ve gone from an audit to a review, or a review to a compilation, to save money. Most of it comes from the economy getting tight and looking to save money wherever they can. You’re looking at the services across the board and, in essence, an attempt to save fees whenever possible.”

Smart Business spoke with Koepke about what services a business should receive from accountants and how to maximize financial statement presentations.

How can a business owner ensure the financial statements are being used properly?
The elementary thing that a business owner has to do is determine who uses the financial statements and how confident are they in their staff putting together the statements. How much do they want someone to oversee or test the numbers and information being put together?

We have some clients who request us to do an audit, examining supporting documentation for various transactions, physically observing inventory and observing pricing. Even though they don’t need it for outside use, they want to feel comfortable going to sleep at night that their numbers are good numbers. Then we have others who, at the end of year, say, ‘I get a tax return, and basically I trust my people giving me numbers. I’ll just have an outside CPA firm come in and assemble the proper financial statement.’ That’s a compilation report, and we don’t express any opinion in those. In an audit, we express an opinion on the financial statements.

What options does a company have?
A lot of times, clients don’t understand. I’ll be performing a compilation, and the client will get a call and say, ‘I can’t talk to you right now, the auditor is here.’ For that client, I’m not an auditor. I think the best thing they can do is talk to their CPA and say, ‘What do I need? Are there requirements? What are the different levels of service?’ Have it explained, because I don’t think a lot of them understand the difference.

A compilation is the lowest level. It provides no assurances on financial statements.

A review consists of limited procedures and provides limited assurance on the financial statements being presented.

An audit includes auditing the systems, obtaining evidence for documentation and a number of transactions, testing the client’s systems to make sure they’re being applied appropriately, and providing positive assurance on the financial statements being presented.

How can someone use their financial statements to get more money?
Lenders look at various key items, including the entity’s ability to generate cash from operations. Some will look at working capital or debt-to-equity ratios. One of the easiest things to do is what I call ‘dressing up the balance sheet a little bit.’

A lot of outside parties like to see a lot of cash. Just by delaying paying a couple of bills at the end of the year, and paying them on Jan. 1 or 2 instead, can show more cash at the end of the year. Lenders will say, ‘Look at all the cash,’ instead of looking at the liabilities side. If they have some lines of credit or current type of borrowings, you can often get the banks to set an expiration date on the line of credit greater than a year from the financial statement date, so it shows as a long-term liability and not a current liability. It looks like you have more cash and resources than the other presentations. And that’s just changing presentation of an item.

How can managing inventory properly help a financial statement?
Make sure you’re including all indirect costs of producing items in inventory costs, which will shift some of the cost to the balance sheet and improve the income by increasing inventory amounts on financial statements.

In summary, a good CPA can help a client pay for only what they need or help them negotiate with lenders to reduce their requirements. In addition, some simple changes in financial statement presentations can dramatically alter the way users of the information look at the company.

JIM KOEPKE is the director of accounting and auditing at Doeren Mayhew LLC. You can reach him at (248) 244-3011.