By Alex Vuchnich, CPA, CFE -
In order to provide the best client service it is essential to understand the environment and industry that a client operates in. This is not solely limited to attest engagements where this understanding is necessary in order to form an opinion about the client's financial statements, but it is also necessary in order for accountants and CPAs to advise their clients. Industry data and analysis can be a time-consuming process in many cases. Quite often advisors find themselves working with a broad range of clients and so specializing in one industry may not be realistic. For these practitioners efficient gathering and analysis of industry data will be beneficial and maximize client service opportunities when advising clients. The following are some pitfalls to avoid and tips for gathering and utilizing industry data.
Before considering how to collect and analyze industry information it is important to consider the limitations inherent in all industry data and analysis. This consideration should ultimately drive what industry data you should seek and rely on for advising your clients. The first limitation to consider relates to the timeliness of the data. All industry data is historical and it is important to understand the timeliness of what you are looking at. One false assumption to consider here is that just because the industry data is old it must not be of any value. In doing industry analysis it is beneficial to have both recent data trends that corresponds to a period similar to which you are analyzing for the client along with several years of older data that might provide context to how the industry operates over longer periods of time. The next limitation to consider is the use of financial estimates. Even within the same industry it is quite common for companies to use various accounting methods and estimates when reporting financial statements. This can make comparison to industry peers difficult and needs to be taken into account. A similar concern relates to the size of the companies making up the industry comparison. Usually comparing a small privately held business to a significantly larger publicly traded company will be limited once factoring in the differences in economies of scale, capital structure and compliance costs associated with public companies.
Considering the above limitations, here are some suggestions for maximizing analysis of industry data.
- Try to obtain industry data that includes both recent trends and more stable longer term trends for analysis
- Consider using metrics such as EBITDA when analyzing profitability between companies to compensate for estimates in depreciation and amortization
- Use a combination of industry data sources, including public filings, trade associations and private data providers
- Even though the financial's of public companies may be of little comparative value to a private company the MD&A provides an excellent source of industry analysis
- Look for data analysis tools that let you mine industry data so that it can be further segmented by classification, size and location