The Importance of Maintaining a Clean Financial Report

Depending on whether your company has to go through an Audit, Review or Compilation at the end of the fiscal year it is important that management has the financials prepared accurately and according to GAAP (Generally Accepted Accounting Principles).  These financial reports are relied upon by Management Executives, Auditors, Tax Accountant(s), Partners, Stockholders, and possibly employees or financial institutions that have secured debt.  The accuracy and integrity of the financial information is crucial to maintaining a solid relationship with these key groups.  Material restatement of the financial information after management has issued the draft will be seen by these key groups that the company’s financial house is in disorder and that management is ill-equipped to meet future financial challenges.  In addition, Audit reports documenting deficiencies tells the reader that the company has areas of financial concerns that have not been addressed during the previous year.

So why should the company care?  The accuracy of these financial reports of how the company has performed, coupled with management’s forecast and strategic plan tells a story of the company’s chance of success or failure.  If the financial statements are misstated than the integrity of management comes into question as well as the reliability of the management’s forecast and strategic plan.  This mistake could have serious financial consequences.  One of them being that the company would not be eligible to obtain additional favorable financing opportunities due to covenants not being met or due to an increase in the company’s risk rating.

How can my company prepare itself, so we avoid this pitfall? Like any company’s strategic plan, there should be a strategic plan specifically for the Accounting and Finance department.  In that plan there should be at a minimum the following: GAAP structured Chart of Accounts and financial statements, Balance Sheet reconciliations, Cash Flow Statement and Analysis, Financial Ratio Analysis, clearly defined explanations related to Quarter over Quarter material dollar and percentage variances, clearly defined explanations related to Year over Year material dollar and percentage variances, documented footnotes, internal control procedures and accounting policy changes that were implemented during the course of the year.

We are a small company and have limited expertise to get this established ourselves.  How can we achieve this initiative without spending a lot of money?  The CPA firm should not be completing the Audit or Review and also be completing the above tasks for your company.  Some CPA firms that can provide this service might charge higher rates (potentially 2 times) or staff the job with less experienced personnel than many outsourced solution providers due to the overhead costs.  In either case, the chosen solution should act as a trainer or educator to the current staff personnel.  Once the staff is trained and becomes self-sufficient, the overall accounting costs will decrease, financial statement accuracy will be improved, integrity of the management team will be maintained and a higher caliber product from the accounting department will be achieved.

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