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

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Accounting Outsourcing | When Are Audits Required


Although most business owners believe that any time they are applying for loans, they need to provide their financial institution with reviewed or audited financial statements is accounting outsourcing. However, this is less likely required by most banks and for most businesses. However there still some instances where audited or reviewed financial statements are required. Large corporations that are applying for loans of several million dollars often still require audited financial statements and many boards of non profits still require their year end finances be audited or reviewed.

Itís often not productive for banks to request audited or reviewed financial statements when businesses are applying for loans, often because they also are asking for good interim financial statements. Accounting outsourcing says that when an accountant is preparing audited or reviewed financial statements, they must remain impartial, with their main duty to the financial institution. Because of this, they are unable to work on behalf of their client when they are in the middle of preparing audit, and cannot also prepare those good interim financial statements. This can become burdensome for most small businesses, especially because that would require them to have to hire two different chartered professional accountants.

If banks are requiring the business owner to provide them with interim financial statements, often a business owner can work with them to provide notice to reader financial statements as well as the interim financial statements, and avoid having to prepare reviewed or audited financial statements. More loans are being approved by many financial institutions based on this protocol, even loans up to several million dollars. If an entrepreneur has been requested to prepare audited financial statements, they or their accountant should double check with the bank to ensure thatís actually correct.

Even though many nonprofits still require audits to be done at the end of their fiscal year, thatís becoming less commonplace says accounting outsourcing, just because the cost of audits is becoming so high, that it is not often viable for small nonprofits to provide audited financial statements every single year end. Many Board of Directors arenít aware of the significant financial cost when they require their nonprofits get audited financial statements, Board of Directors should be made aware of this, and change their bylaws in order to allow nonprofits to supply notice to reader financial statements and save significant amounts of money. Having audited financial statements may sound great, but if it will cost the nonprofit a significant portion of the money that they have raised, the Board of Directors should ask themselves if itís worth it.

Because financial institutions are asking business owners to provide good interim statements, in order to get a gauge of the financial health of the business as it is currently, instead of a year ago, accounting outsourcing says that most entrepreneurs can provide the interim statements with notice to reader financial statements, and not go through the cost and time it takes to produce reviewed or audited financial statements.

Business owners often believe that when they request their accountant prepare them reviewed or audited financial statements, that the accountants duty is to them, the client says accounting outsourcing. They do not know, or are aware that when preparing these higher-level financial statements, that there accountants duty is to the bank that is requesting the statements, and not the clients. Because of this, entrepreneurs should ask the accountant when itís appropriate to prepare reviewed or audited financial statements, and when a business owner can accept a notice to reader financial statement instead.

The reason why chartered professional accountantsí duty is not to their clients when preparing reviewed or audited financial statements, is because any time they are preparing reviewed audited financial statements, there for additional duty is to the external resource and they must remain impartial to ensure the numbers that they are preparing are completely accurate. This necessity to remain impartial, means that the accountant has to limit what advice they can give their client at this time. Because of this, most businesses are better off getting notice to reader financial statements instead. While these are easier to produce, and less time intensive, itís also much more advantageous to business owners because their accountant will be able to offer them advice, and tax planning strategies based on the information in those statements.

Because it is better for business owners to get notice to reader statements, many people ask why would anyone request reviewed or audited financial statements in their business says accounting outsourcing. Generally, the only reason why business owners would need to prepare reviewed or audited financial statements, is when they are applying for extremely large loans. Some nonprofits also are bound by their bylaws to get reviewed or audited financial statements for their year end, but for most entrepreneurs and small businesses, notice to reader statements are all thatís needed.

Even more these days, millions of dollars have been loaned to small businesses and entrepreneurs on notice to reader financial statements says accounting outsourcing. Part of the reason for this, is because banks are requesting good interim financial statements as well as the notice to reader financial statements. They are finding that those two reports combined, are a better gauge of the financial health of the business then audited financial statements alone. Entrepreneurs should verify with their bank if theyíve been asked to prepare audited financial statements, if a business owner could provide interim statements along with notice to reader statements instead. Even though most financial institutions have relaxed their requirements, that has not been indicated on all of their loan applications, so while itís not required many business owners think that it still is.

Entrepreneurs who are applying for loans can save themselves significant time and money by verifying with their financial institution that they can get away with providing notice to reader financial statements as well as well-prepared interim statements. This can help them secure their loan by providing great financial information to their bank, without all of the time and expense of preparing audited financial statements.