Financial statement reporting is a foreign concept to those who have not had the opportunity to study the requirements and complexities of financial reporting. Financial statements that are issued by a Certified Public Accountant (CPA) are prepared under guidelines provided by the American Institute of Certified Public Accountants, the various State Boards of Accountancy, and the norms of the industry of which the client works. The requirements that a CPA must comply with to issue a set of financial statements are much more stringent than it is for bookkeepers, tax preparers, etc. While statements prepared by a CPA may look similar to the unsophisticated reader to documents prepared by others, they are actually quite different in the process and due care that went into the development of the underlying information that went into the final report.
Due to these reasons most banks, lending institutions, and other sophisticated readers request that financial statements be prepared by a CPA because they are aware of the work that is required of a CPA in preparing any financial report.
The accountants’ report, or sometimes referred to as either the opinion or disclaimer statement, is the document in which the CPA conveys to the reader the level of service provided in the preparation of the financial statements. Generally most readers of the report misunderstand the document as it has been drafted by the AICPA for readers who are anticipated to be aware of the regulations rather than the average reader.
Financial statements are a collection of interrelated documents that are a reflection of the financial position and activity of the entity being reported upon, drawn primarily from the books and records of that entity. The financial statements will include a statement of the accountant preparing the documents, generally known as the opinion statement. The opinion statement can be of three general types: (1) An audit opinion in which the reporting accountant has audited the entity being reported upon, and accomplished such other investigative work that the he/she can draw upon such that a statement of opinion as to accuracy and fairness of the financial statements can be made in conjunction with the rules and regulations as set forth by the American Institute of Certified Public Accountants (AICPA), and the State Board of Accountancy; (2) A review opinion in which the accountant has performed certain analytical procedures but short of any audit procedures, and therefore reports on the statements on a more limited scope, again within the rules and regulations of the AICPA and the State Board of Accountancy; and (3) the most common of disclaimer statements known as a compilation in which the accountant has compiled the information provided by the client in a manner that complies with generally accepted accounting principles as prescribed by the governing regulatory boards. The accountants’ work is highly limited in scope with a compilation statement and the disclaimer that proceeds the financial data presented states this position.
The AICPA, and the respective State Board(s) of Accountancy within each State prescribe the actual wording in each of these statements. Many uniformed readers of these opinion statements, or disclaimers, find the wording harsh or unflattering to their respective businesses. In our highly litigious community it has been determined through court proceedings, state and national regulatory bodies, committee(s), and advisory boards, both within and outside the AICPA, and the various state boards of accountancy that the actual wording prescribed is to be used by the reporting CPA so as to provide uniformity in the level of reporting. The reliance of the reader(s) of the financial statements as to which level of service was provided is enhanced by the adherence of the reporting accountant to the guidelines as prescribed by the governing and advisory authorities.
Experienced readers of the disclaimer statement(s) expect the wording of the opinion or disclaimer to be presented within these guidelines which in turn validates in the readers’ own opinion that the reporting accountant understands the expected requirements of the profession and has followed the guidelines as prescribed by the governing authorities.
Deviation from these reporting guidelines although possibly desirable by an individual business entity or owner to somehow present in better light the activity and financial position of the company would tend to taint the financial statements, and generally raise overall suspicions by an experienced reader such as lender or banker who could, or should then doubt the expertise, and general competence of the reporting accountant. Any explanation of financial statement data or underlying information should always be reflected in the footnotes of the financial statements.
Each level of reporting has inherent within the work that supports the opinion or disclaimer which require certain procedures or work guidelines that must be followed, and therefore, the cost of each level of reporting varies with the requirements of the report.
Without belaboring the reporting function further, it is sufficient to be aware that the guidelines required in preparing financial statements prepared by our firm are within the guidelines set forth by the appropriate governing bodies. The quality of the work behind the reports, as well as the planning process for your tax analysis, the preparation of your tax returns, and so on are done so diligently so that the quality of the work will stand up should there ever be any question by the parties at interest.
Our concept is that the more you know about what we do only enhances our mutual understanding of your needs. Should you have any questions regarding these matters, please feel free in calling directly at (818) 346-2160, or leaving a message at our website to discuss any or all of the items enumerated herein.