The recessionary economy. Recent business failures. The events of September 11. All of these economic influences converged in 2001 to create one of the most turbulent financial reporting environments in recent memory, requiring the extra care and attention of financial statement preparers to ensure that the public has a clear picture on the health and welfare of American businesses.
The Big Five accounting firms, in cooperation with the American Institute of CPAs, has issued a detailed list of risk factors to consider when preparing and communicating financial results for 2001. The document, Impact of the Current Economic and Business Environment on Financial Reporting, also includes suggestions for how management, audit committees and auditors can contribute to a clear understanding of a company's health.
Companies do not have to be among the Fortune 500 to benefit from these suggestions. Any size client would be well served to run through these reporting issues and recommendations.
Key financial reporting issues addressed in the document include:
- Liquidity and Viability - In the current environment, the presence of certain conditions, in the aggregate, may create questions about a company's ability to continue as a going concern. These conditions are detailed in the report.
- Changes in Internal Control - In addition, the presence of certain other conditions may compromise internal control over financial accounting and reporting systems. These are also detailed in the report.
- Unusual Transactions - Among the most frequently cited sources of financial reporting risk are significant adjustments or unusual transactions occurring at or near the quarter-end or year-end.
- Related Parties - Increased pressure on management to hit financial targets has heightened the risk of improper treatment of related party transactions, which lack the independent qualities that are intrinsic in transactions with unrelated parties.
- Off-balance Sheet Arrangements - Transactions intended to shift assets or liabilities off the balance sheet, including those with special purpose entities, require special attention because of the complicated accounting and disclosure rules applicable to many of those transactions.
- Materiality - Management may consider materiality in preparing a company's financial statements, but it is generally inappropriate to permit known errors to remain in the statements based merely on their immateriality. Both quantitative and qualitative factors should be considered when assessing the materiality of misstatements.
- Adequacy of Disclosure - It is important to assess not only whether the technical accounting and disclosure requirements have been met in a company's financial reports, but also the depth, nature and transparency of the disclosures. In addition, while the presentation of pro forma earnings has become relatively common, there is a growing concern that such financial information can mislead investors if it obscures GAAP results.
- Specific Financial Statement Risks - The profession has outlined additional financial statement areas that merit consideration in the current environment.
Management, auditors and audit committee members are urged to download the document and review the more than 30 specific recommendations for actions they should take to ensure that financial reporting is as complete as possible in this turbulent year.