Private Capital Markets

As the Board oversees the company’s management, they should be asking management what alternatives have been considered in the selection of the company’s accounting policies, in the determination of judgments and estimates and interpretation of accounting standards as significant items such as these can have a significant impact on the overall picture presented by the financial statements. This is especially true where the outcome appears illogical or counterintuitive. There are many cases where it simply isn’t possible to present as pretty a picture as may be desired, but it’s always good to ask what the alternatives are and what the results of those alternatives may look like.

At the end of the day, the goal is to provide transparent financial statement disclosure that demonstrates the spirit of the transactions the company has been a party to during the periods presented.

4. Financial statements’ reliability can vary widely

There are various levels of assurance that may be provided on a set of financial statements, with that level of assurance indicating how reliable those financial statements may be. In the context of audited, reviewed or non-audited financial statements it is important for the Board, or any reader for that matter, to take into consideration the company’s internal controls affecting financial reporting. Such internal controls include the standard ‘checks and balances’ but also include items such as the qualifications and experience of the individuals involved and their respective workloads.

As a company grows in complexity, it is important to ensure that staff supporting the financial reporting function are adequately trained, offered the opportunity to update their knowledge and, when necessary, are supplemented through the addition of consultants or other technical resources. Workload issues can also present a challenge, in both a growing and a shrinking company, in the preparation of accurate and timely financial information. Management should query such items to ensure the financial reporting personnel have the resources they require to produce a consistent, quality product. Should there be concerns about lack of such resources, the Board should dig deeper into the financial reporting to ensure its quality has been maintained and establish measures to remediate the issue.

5. An audit does not ensure a company’s operations are run efficiently

By their nature, financial statements tell you what has happened in the past, information that may help form expectations of future results. This information is valuable from a big picture perspective, but reveals little about whether the company is well managed, has the right strategic direction, or is operating to its full potential. These finer details are vital to a company’s ongoing health and require close attention from the Board and management.

To gain the necessary insight to evaluate these finer details, additional reviews (beyond those into the company’s financial statements) may be advisable. The type and depth of these reviews will vary depending on scope and complexity and will need to be customized with the input of the Board and management. Depending on the internal resources available, a consultant may be a good alternative to assist in designing and/or delivering such reviews and analysis.

6. Financial statements require interpretation in order to evaluate a company’s performance

A company’s financial statements present a wealth of information on which to evaluate its performance. However, it is up to the reader to evaluate and interpret that information. Such evaluation may include the review of supplementary information such as an aged payables listing; discussion with the company’s finance personnel and management; or the application of financial analysis tools such as ratios. There are a number of ratios and similar tools that can be applied in the evaluation of a set of financial statements.

Many finance teams will prepare a monthly or quarterly report for the board’s consideration that will include such information and analysis, the content of which should serve to assist the directors to evaluate performance and thus fulfill their fiduciary duty of oversight.