Why CFOs and CEOs Are So Afraid of GAAP?

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 It has always been one of my greatest pet peeves to hear highly intelligent CEOs and CFOs proclaim "We don't do accrual basis except for the audit, we're a cash basis company" or any  other ridiculous statement to the same effect. It as if they think that by uttering this nonsense that suddenly all of their legal obligations, commitments and contingencies just disappear. Of course the reality is that this kind of statement is the result of years of business schools teaching their MBAs and undergrads the 'cash is king' mantra. Since accrual basis accounting and GAAP in particular, from a technical standpoint are generally alien to these individuals the result is to bury one's head in the sand and ignore economic realities. Of course for many companies this often proves fatal to the continuity of the business enterprise.

 My disdain for this kind of statement is not an attempt to somehow place accrual basis above cash, modified cash or tax basis accounting either. Each basis has its own role and importance. Cash for day to day operations, accrual for forecasting cash flows and determining financial health, tax for regulatory reporting, etc. Most off the shelf accounting software allows for seamless reporting between cash and accrual so there is almost no excuse for not using both to manage your business.

What it comes down to is that is that many CEOs and CFOs of SMBs don't know how to interpret accrual basis (or GAAP) and so they ignore what they don't understand. Your CPA (practitioners pay attention here) should be assisting you in understanding your accrual basis financials and the significance of what is contained within those statements and the footnotes. They should be coaching you on why you need to monitor these statements throughout the year, not just for year-end reporting associated with a financial statement audit. Your organizations ability to grow and avoid financial pitfalls is only half complete without both the cash and accrual picture. I have recently worked on a number of bankruptcy cases and what they all had in common is that none of the business owners truly understood the extent to which they were behind on their financial obligations. All of them had CPAs advising them. After I finished unwinding what had transpired and the extent of the damage all of the owners had a similar question: "Why was it that I, someone they had known for less than a month was telling them this rather than the CPA who they had known and worked with for years?". Good question.

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by Alex Vuchnich, CPA, CFE - Alex Vuchnich is the developer of Controlzkit an internal controls anaylsis tool and shares his perspective on how audit and accounting theory, technology and professional ethics interrelate to create forward thinking profitable firms.

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