&Financial Accounting Auditors

Starting about this time each year, an army of accountants, auditors and CPA’s take to the field to inspect the financial records of businesses in an effort to help ensure the information a business provides to others is accurate. Correctly reported financial information is mandatory for every business regardless of its size. Inaccurate financial information can lead to errors in judgment that may cause losses to others who rely upon this information, so financial reporting standards were adopted to help consistently guide the creation of financial reports. Although different standards exist in different countries.

Most people have heard of the massive accounting scandals that resulted in the collapse of Enron as well as the recent inquiries to Under Armour. Naturally, big public entities receive a lot of attention when it appears something has been reported erroneously, but a lot of smaller businesses find crafty ways to make their financial health appear better than it actually is.

Inventory on hand is one item that can easily be manipulated to make a business look better. While visiting a very prominent business owner’s warehouse, I noticed some very old and essentially unsaleable merchandise. When I pointed it out to the business owner that it should be written off and thrown away, the owner informed me that it had to be kept on the financial statements to support bank loans. There is hardly any chance a banker or auditor would know this was bad inventory and it is remotely possible someone would someday buy it so calling it accounting fraud would not be right. A good indicator of sound inventory practices involves the “annual count”. In the past, businesses would close for a day or two for inventory so they could count what they had on hand. It still happens now and then but closing for inventory in today’s environment is considered prehistoric and a good indicator of poor technology and possibly poor management and accounting. Although any business may find itself in the position to take a physical count of inventory to make doubly sure its records are right.

A big topic relating to accounting irregularities, if not actual fraud, is referred to “Revenue Recognition.” This is a major concern since recognizing sales before the products or services are delivered, increases sales without the corresponding costs of these sales, leading to much greater profits than are actually earned. As a treasurer of a large corporation, I was at one time required to certify the corporation’s financial statements and this topic came up in our audit. This was long before Enron and I was baffled by the question. I had to work hard to figure out how a business could or would want to enter a sale before it was complete. Fortunately, we had a very good accounting manager and it was not an issue. A lot of the problems associated with inaccurate sales reporting seem to be centered in the technology arena since these businesses are financed in a large part by how much and how fast they grow sales. I am sure the first business to record sales done in advance used the excuse they had an agreement to provide the product or service so isn’t that a valid sale? Of course, this logic is terribly flawed from an accounting perspective, which is why accounting standards and principles of reporting have been established.

Some business owners definitely “cook the books” and misrepresent their financial condition, but a good business owner takes the necessary steps to make sure current accounting regulations are followed and any reports created are as true and accurate as possible.