With the proliferation of accounting systems which come with “canned” financial statements many business owners are absent minded about financial statements prepared by the CPA. In all honesty, if you don’t need to pay for CPA prepared financial statements, don’t spend the money. With one caveat; do you really understand what they mean? Do you trust your internal accountants to tell you what you “don’t” want to hear? CPA’s prepare three general kinds of financial statements:
(1) Compiled Financial Statements.
(2) Reviewed Financial Statements.
(3) Audited Financial Statements.
Compiled:
Many people have the belief that compiled financial statements is accomplished by taking those “canned” financials that come out of your accounting system and simply placing them on CPA stationary. Nothing could be further from the truth. In fact there are volumes of standards and rules which must be diligently followed by a CPA to conform to Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accounting. These standards provide for the presentation, disclosures, basis of accounting, the basic set of financial statements to be presented and a variety of other provisions that must be adhered to in order to issue a report. Compiled financial statements are typically the cheapest form of financial statements many CPA’s prepare simply because they do not require the labor of examination, confirmation and other attestation procedures performed under reviewed or audited financial statements. But in no terms does that mean a CPA can prepare them blindly. Generally, for many businesses the basis of accounting most frequently used are Modified Cash Basis, Income Tax Basis and GAAP. In some cases where the financials are prepared based on industry or other regulatory accounting rules -Statutory Basis may be used.
Year after year I find all kinds of mistakes on “internally” prepared financial statements. Often, I find financials that overstate Gross Profit Margin, leaving owners to believe their profit margin is higher than they thought. I have even found financials that omitted some line items of expenses all together. Balance Sheets that don’t balance. Most amazing is the enormous percentage of businesses that do not employ a Cash Flow statement. Everyone knows Cash is King right? The simple truth is many bookkeepers do not know how to prepare even a simple cash flow statement, or how to use the system report generator. Some report generators can be tricky devils. Owners and managers need to be aware today’s accounting systems allow you to prepare financials in any which way you can dream of thanks to flexible report generators. This is a great thing, but un-managed and un-checked can lead users of these reports to very wrong conclusions. For this very reason many outside users require that financial statements be submitted only if they are prepared by a CPA. Simply put, more sophisticated users know that although the financials are not reviewed or audited, due care was taken by a professional to present fairly financial information.
One last note, every set of financial statements issued by a company is the responsibility of management. This is to say that even if a CPA prepared those financials the underlying information is the representation of management and therefore they are responsible for that information. This is true even of financial statements which have been audited by outside independent accountants. Just take a look a Dow Chemical, Ford Motor Company or any large organization and the auditor’s report clearly sates that fact.
I will continue this news segment with the other two types of financial statements “reviewed” and “audited” financial statements.
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