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.
For more information contact:
Bryndon L. Kydd
bkydd@bdo.ca