10 Feb Is Annual Financial Reporting Enough?
Businesses generally issue year-end financial statements to let investors and lenders evaluate their financial health. However, proactive stakeholders, including the company’s chief executive officer and board of directors, may want more than one ‘snapshot’ per year of financial results. Interim statements let stakeholders know how a company is doing each quarter or month, but they also have drawbacks and limitations.
Interim reports may provide signals of impending financial turmoil due to, say, the loss of a major customer, significant uncollectible accounts receivable, or pilfered inventory. They also might confirm that a turnaround plan appears successful or that a startup has finally achieved profits. In short, they allow stakeholders to check up on performance, giving them either mid-year peace of mind or the opportunity to implement corrective measures early on.
Beware: interim financials usually do not conform to U.S. Generally Accepted Accounting Principles. Outside accounting firms rarely review or audit interim statements because of the cost to do so. Absent external oversight, internal finance, and accounting personnel with bad news to report might be tempted to cook the books to appear more profitable.
Interim numbers may omit many of the adjustments that external accountants make at year end, such as estimates for bad-debt write-offs, accrued expenses, prepaid items, management bonuses, or income taxes. In addition, some companies save tedious bookkeeping procedures, such as physical inventory counts and updating depreciation schedules, until year end. So, interim account balances might reflect last year’s amounts or be based on historic gross margins.
It also is important to realize some companies are seasonal. If there are operating peaks and troughs, for example, you cannot multiply quarterly profits by four to reliably predict year-end performance. For seasonal operations, you may want to benchmark last year’s monthly (or quarterly) results against the current year-to-date numbers.
When the numbers do not add up
If interim statements reveal irregularities or trigger concerns, consider seeking outside accounting expertise. We can conduct a forensic investigation or agreed-upon procedures that target high-risk account balances or an account that was previously adjusted by auditors. Contact us for more information.