Financial Statement Accuracy & Reliability

Dec 17, 2015

Not long ago, I was talking to a CFO about his perspective regarding the uses of financial statements. The CFO was most interested in the credibility of statements as viewed by shareholders outside stakeholders. His biggest concern was the reliability and consistency of the numbers being produced by the financial statements. He believed financial statements should be “audit proof” to protect the consistency and reliability of statements so unexpected year-end adjustments would not dramatically change the previously published financial results. Based on his experience, financial statements had changed as a result of the year-end audit by outside accountants which dramatically distorted the outcome, and thereby impacted his credibility with his stakeholder group.

As a result, this CFO was very cautious about future financial statements and the lessening the risk of dramatic alterations. I believe his plan to avoid such problems in the future was to establish one or more cookie jars to include accruals of liabilities which could be presented differently, should an unexpected audit adjustment appear. This would allow him a reserve to invade, if necessary, to protect overall firm profitability.

I suspect there were a number of such protections crafted for both the income statement and balance sheet to protect his credibility and the credibility of the entire management team.

At no time during our discussion did the CFO mention the use of the financial statements for management purposes or for costing purposes, which could be related to management information. I believe his main focus was simply the year-end audit and protecting against any surprises. Even if it meant overlooking how management information could be improved or driven from accurate and timely financial statements.

Unfortunately, his attitude toward year-end financial statements is not unusual in today’s business world. My team sees more and more cost information or management information being shortchanged due to a focus on GAAP basis financial statements.

I completely support accurate and timely GAAP-based financial statements, but I do believe it should represent the foundation for management information to follow. This information can help guide the future direction and assist in the proper management of a company. Understandably, it creates a far more challenging environment for the CFO who must now focus on the accuracy and determine opportunities for rearranging data in a fashion that would be useful to the operational management team for improving and directing their results.

I believe the benefits available to companies who undertake the direction toward such a goal will find significant benefits. Reporting will improve, not only for the GAAP-based financial statements but also for the portion of the financial statements directed toward improving operational efficiencies.

Categories: Cost Accounting