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E-Myth – “Why most small businesses don’t work & what to do about it”

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Accounting Outsourcing | Are Audits Necessary?

Business owners often approach their accountant thinking that they need and audited financial statement or a review engagement but they donít know why says accounting outsourcing. As Warren Buffett does famous for saying, accounting is the language of business. Entrepreneurs who understand the language of business can be better prepared to run their business and become successful. Since 50% of entrepreneurs who are in business, close their businesses within five years, and 29% of those failed businesses say that the reason why they failed was because they ran out of money. There are several things that business owners can keep in mind when they are thinking about audited financial statements, or review engagements, to verify if they are absolutely necessary for their business. By answering these two questions, they can determine if thatís needed.

The first question is, can you summarize the difference between notice to reader financial statements, reviewed financial statements and audited financial statements? Notice to reader financial statements are the most common financial statements for a business owner to need. They are verified by the chartered professional accountant as arithmetically correct, and therefore the numbers are plausible. These statements says accounting outsourcing are very efficient to produce, and therefore cost the smallest amount of money. Reviewed engagements, contain the same information as a notice to reader financial statement, the accountant has gone through various testing to ensure the reasonability of the numbers. Rather than being merely plausible, the numbers in the reviewed engagement are considered believable. The audited financial statements, contain the same information, but have actually been confirmed as accurate, because of the amount of due diligence the accountant uses to verify their accuracy. The accountant will go to the bank and verify the totals of the numbers as accurate, as well as send out Accounts Receivable reports to verify that the amounts that are outstanding are still outstanding and that the business will actually be getting paid for those jobs.

The second question is when you are completing reviewed or audited financial statements, who is your main fiduciary duty to? Accounting outsourcing says the main fiduciary duty of the chartered professional accountant is to the external source not their client. Whether the bank requires the audited financial statement or review engagement, whether itís a board of directors, the accountant technically works for that external source and not their client.

The third question is, if notice to reader statements allow chartered professional accountant to focus on the client, why would anyone choose an audit did financial statement or a review engagement? Accounting outsourcing says the only reason that anyone would require reviewed engagement or audited financial statement, is because they need tomorrow a significant sum of money. Since many banks are loaning several million dollars based on notice to reader financial statements, it would have to be an extremely large sum of money in order for these financial statements to be necessary. Although reviewed or audited financial statements used to be more common years ago, this is no longer currently the case.

Many business owners donít know when they need to prepare audited financial statements, review engagements or notice reader financial statements says accounting outsourcing. Because of this, they ran into difficulty by asking their accountant to prepare reviewed or audited financial statements when itís not necessary. Since 50% of all business owners close the doors to their business within five years, and 29% of them is because they ran out of money, helping business owners secure loans in their business by doing what type of financial statement is needed can go a long way in ensuring they can have the money they need to stay financially viable. By answering a series of questions, business owners can understand more clearly why they would require certain financial statements over others.

The first question is when our reviewed or audited financial statements generally necessary? Accounting outsourcing says that the only times these types of financial statements are generally necessary is when a business is applying for an extremely large loan, in excess of several million dollars, or nonprofits. For most small businesses and entrepreneurs, the only financial statement that they require whether itís for year-end, or for loan applications is a notice to reader financial statement.

The second question is, what size of loans have been seen issued based on notice to reader statements? Thanks are starting to loan several million dollars to businesses based on notice to reader financial statements as long as theyíre also providing accountant prepared interim statements says accounting outsourcing, so business owners should always assume that the bank is going to require a notice to reader financial statement unless they have specified otherwise.

The third question is as banks relax their stances on lending to businesses based on notice reader financial statements, is it usual for entrepreneurs to believe they still need one when they in fact donít? Accounting outsourcing says that while itís true that business owners still believe that they need reviewed engagements or audited financial statements, thatís mostly because they are remembering the last time they applied for a loan, and from remembering what they needed instead of basing it on what banks actually do need. Also, as banks are changing their positions, this information is not make it onto current bank loan application forms, so rather than looking at the form and making an assumption, business owners should always ask their financial institution if they still actually need reviewed engagement or audited financial statement, or if there able to provide a notice to reader financial statements along with good interim financial statements.

The last question is when accountants see financial institutions asking for review engagements, but they believe is unreasonable, what should the accountant do? Accounting outsourcing says that itís completely within the accountants scope to ask the bank to reconsider, or review the case to determine if this is absolutely necessary. The chartered professional accountant is able to speak with the bank, and come to an agreement on what the business needs to supply in order to get approved for a loan.