February 2012 | accounting today 15
Behind the numbers
Can you accept presented financial data at face value?
BY ASHRAF ELKOTANEY
We all face numbers, sometimes on a daily basis.
Most of us deal with invoices and receipts.
Some of us deal with investment reports,
bank account reports and stock market updates. Accountants prepare and use companies’ filed statements, tax returns and many
other sources of financial information.
Many CPAs and financial examiners can
be asked, as part of their job, to provide their
opinions on the reliability and accuracy of
financial information. They can also be involved in testifying in court on the validity,
reliability and accuracy of financial information presented by individuals, organizations
or other parties. Other financial professionals
are required to make judgments on the health
of companies using the financial reports filed
by them with different governmental offices,
as well as the accuracy of financial data reported in those reports. Other parties, financial and non-financial, rely on and use these
judgments, opinions and certifications while
making decisions. This can be seen in court
orders, investment decisions, loan approvals,
contracts and agreements, etc.
Can these accounting professionals and
financial examiners accept the financial information provided by others at face value
without making additional efforts to verify
and validate the story behind these numbers?
Every number presented has a story behind it,
whether in a contract agreement, a contract
settlement, or a recorded transaction. Every
number has a decision behind it, a decision
to present the number in a certain way. Rules
and regulations affect and direct the decision
to present the information in a certain way.
So, what are the steps that a financial professional should follow to make an educated
opinion on the reliability of the financial information presented?
For example, filed tax returns can provide
information about taxes paid or received,
transactions that have tax effects, new lines
of business, or the types and number of entities within a group or a company.
Even if the information filed with the
government is inaccurate, it can be useful
in examining other information. Although
manipulated information is unreliable, it can
give a clue about what the actual information
should have been.
the numbers as presented in its reports.
Reading other reports filed by the company and tying back these reports to the information provided can help professionals in
making a rational judgment about the consistency and accuracy of information processed
by the company.
FINDING THE DATA
Finding the data is the most critical step in
verifying financial information, as it requires
the skills of asking the right questions and
analyzing the answers to these questions.
Information filed with the government can
be used to trace and evaluate the information
in the reports the accountant is examining.
OTHER SOURCES OF DATA
Accounting professionals and financial examiners can also search for other sources of
data to validate the numbers and form an
opinion on the reliability of those numbers.
Analyzing source documents such as contracts, receipts, invoices and financial documents can help determine the accuracy of the
Confirmation with outside or related parties of the financial transactions between
them and companies can be a critical tool in
validating these transactions. Confirmation
can be attained by means as simple as sending e-mails or letters to outside parties, or
calling these parties to confirm the detailed
information about those transactions. Documenting outside parties’ confirmation will be
crucial in the process of proving the reliability
of the information.
Requesting exchanged information between a company and its external auditors
can reveal the story behind the reported numbers and the consent that had been reached
between the parties. Although concealment
can be perpetrated between the company
and its external auditors, understanding the
company’s financial and legal position can
make a difference in the judgment reached
Going beyond the traditional tools to
search for other documents can help with
understanding the numbers reported. Reading the minutes of the board meetings held
by a company throughout the year — if the
company allows — can reveal the strategies
utilized by the company to record and report
After gathering the right documentation,
analyzing those documents can begin. This
step is critical in the verification process,
as final opinions will be based on analyzing those documents and finding the truth
behind the story of the numbers. Analyzing
documents can be a very labor-intensive and
time-consuming process, but the outcome
will be worthwhile. Analyzing documents can
break the web of confusion that a company
deliberately created and reveal the truth that
a company wants to hide.
Accounting professionals and financial
examiners can analyze the documents by
verifying that the numbers were consistently
carried forward from one report to another,
and by tying these back to the source documents. Professionals can also develop their
own scenarios of how the numbers should be
recorded and reported within the statements.
Then they should juxtapose those scenarios
against the actual information reported.
It is very important for the accounting
and financial professional to give an opinion
based on verified information, because many
parties rely on their judgments and opinions
in making other related decisions.
Due diligence and careful investigation
before financial reports are finalized serve
as preventative tools to thwart manipulated
and misleading information from appearing
on the reports. Manipulated and misleading
information can negatively affect other parties’ decisions. This negative impact can be
prevented if accounting professionals and
financial examiners spend adequate time in
verifying the numbers reported in financial
STANDARD FOR UNCERTAIN TAX
POSITIONS NEEDS TWEAKING
NORWALK, CONN. — The Financial Accounting Foundation has conducted its
first post-implementation review of an accounting standard, starting with FIN 48,
Accounting for Uncertainty in Income Tax
Positions, and found it generally achieved
its purpose, though it still needs some
improvement. The report, which was
compiled by an independent committee
appointed by the FAF board of trustees,
also found from interviews with various
stakeholders that consistently applying
FIN 48’s guidance may not increase the
comparability of information about income tax uncertainties across companies
and other reporting entities.
“The principal reasons comparability
may not be increased are managements’
judgments and Tax Code complexity,”
said the report. “Management has to
assess each tax position separately on
its technical merits, assuming taxing au-
thorities’ full knowledge of the positions.
Different judgments may result in differ-
ent reported outcomes, even for similar
uncertain income tax positions.”
Overall, the report found that the
benefits of FIN 48’s improved consistency
and reporting of income tax uncertainty
information outweigh its costs.
Ashraf Elkotaney, CPA, CFE, CMA, CFM, is
a financial reporting manager at Universal
Holdings Insurance in Fort Lauderdale, Fla.
PROFESSIONAL ORGS OBJECT TO
MANDATORY AUDIT ROTATION
ALTAMONTE SPRINGS, FLA. — The Institute
of Internal Auditors sent a comment letter to the Public Company Accounting
Oversight Board taking issue with the
PCAOB’s proposal to require mandatory
rotation of audit firms for listed companies, echoing concerns raised by the
American Institute of CPAs and the New
York State Society of CPAs.
The IIA pointed to its own research
indicating that a majority of members
disagree with the concept, citing the
disadvantages of mandatory rotation,
including increased costs to the company
and the audit firm, a steep learning curve
and loss of knowledge, potential erosion
in audit quality, potential opportunities
for opinion shopping, and the potential
that rotation would diminish the role and
influence of the audit committee.