Vote BiggsKofford for 2014 Best of Business!

Best of Business 2014

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Kurt Kofford

Kurt Kofford

Director

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    Consider these scenarios:

    1. You just received a regulatory notice in the mail from the government agency that regulates your company or organization, informing you that the audit of your company didn’t meet the required standards. The notice uses threatening language to spell out the negative consequences of not complying. What went wrong?
    2. You just received your company’s audit report in the mail and you realize that you have had very little interaction with your auditors. Instead of reaping the side benefits of insights and recommendations from the auditors outside perspective developed while auditing your organization, all you got were the pieces of paper you are required to give to the bank. What went wrong? Could this situation have been changed by taking different steps when choosing a CPA firm?

    Aren’t all financial statements audits created equally?

    The answer is a definite no! Audits are not a commodity in which one gallon of gas is just like the next. Yes, there is a large body of professional standards to guide all auditors in the performance of an audit and reporting on financial statements, but there is a wide variance in actual practice as to how those standards are followed.
    The professional auditing and reporting standards are broad enough and flexible enough to allow for the uniqueness of different companies and organizations and the different approaches of CPA firms performing the audits. This is as it should be, because no two organizations are alike and professional judgment is still the most important element of an audit.

    When an audit is not an audit

    Unfortunately, in my 26 years as a CPA and an auditor, and my experience over the last four years on the Colorado State Board of Accountancy, I have learned that some audits are better than others, and a few are downright bad. There are many factors that go into creating a superior audit, including the approach, skills, knowledge and time allocated to the audit. Most of these are factors in arriving at the cost of an audit, yet many organizations and companies select their auditors on the basis of cost alone as if the audit by one CPA firm is the same as the next.

    How big is the problem?

    No one knows for sure how many sub-standard audits there are, but recent studies in certain sectors have revealed concerning deficiencies. Substandard audits have become enough of a concern for the department of Housing and Urban Development (HUD) that they are considering a proposal to require any auditor performing an audit to be submitted to them to be from an approved list, which would allow them to exclude auditors who have not been performing audits up to the required standards.

    What to Do? Our Recommendations

    The first thing to consider is the competence and longevity of the firm or accountant that you are engaging to audit your company. How long have they been in business? What is the firm’s professional standing and experience in your industry? Do they list references in their proposal for similar work and similar industries that they have done work for in the past? Check the Web site for the Colorado State Board of Accountancy to see if they have had any complaints filed against them. Not only should you find out if the CPA firm is a member of American Institute of Certified Public Accountants (AICPA), but you should inquire how they have used their membership to improve their audit quality. For example, the AICPA has Audit Quality Centers for specialized areas such as employee benefit plan audits, where members can join to access resources to improve the quality of their audits. Also, check to see if they are in good standing with the Colorado Society of Certified Public Accountants (CSCPA). Both organizations require audit firms to conduct tri-annual peer reviews (an audit of the auditors).

    Ask them for their most recent peer review report and discuss the finding of their peer review with them to determine what suggestions for improvement were made.

    And of course, it’s important to take a detailed look at the proposal. Are they proposing in writing that your company’s needs will be met and to the proper regulations? When looking at proposals to decide on a CPA firm, many companies put together an audit committee to come to a decision as a group.

    In my position with the State Board of Accountancy, I’ve seen situations where businesses or organizations have made bad decisions in choosing CPAs when it came to their audit. These situations haven’t made headlines, but bad situations happen more than what I would like to see.

    The Bottom Line

    Selecting an auditor based only on cost is not a good idea. Often the old axiom applies “You get what you pay for”, so make sure you are reaping the benefits that an audit should bring to an organization.

Braden Hammond

Braden Hammond

Sr. Manager

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I have had people tell me that, while they understand why financial statements are necessary, they believe using them to run their business is like driving a car by looking into the rearview mirror. It’s true that historical financial statements have limited usefulness for decision-making. However, forward-looking or forecasted financial statements can be a powerful tool to help you grow your business.

To get the most out of your forecasted financial statements you should (1) start with your long-term goals, (2) go beyond the income statement, (3) identify milestones and incentivize employees to achieve them, and (4) monitor your progress.

Start with your long-term goals

Hopefully it’s apparent that the financial statements I’m referring to are not the stereotypical budget you hastily prepare, by adding x% to last year’s revenues and expenses, and then stick in a drawer until next year. Instead, these financial statements should be based on your long-term goals.

For example, assume your goal is to sell your business in five years for $10 million. You know that businesses in your industry typically sell for five times net income, so you need net income of $2.5 million five years from now to achieve your goal. You can work your way up the income statement to determine the revenues that you need to generate that specific net income and then fill in the rest of the details. Finally, you can forecast income statements for years one through four to get from where you are today to where you want to be in five years.

Go beyond the income statement

No one ever bought a vacation home with net income. To do that, you need cash flows. So, while forecasting the income statement is a great first step, you also need to forecast the balance sheet.

Growing a company generally requires upfront cash investments in advertising, inventory, equipment, personnel, etc. To be successful, you need to be able to predict when you will need that cash and where it will come from. How much extra cash do you need? Can it be generated internally? Will you need additional debt or equity financing? The only way to answer these questions is to forecast the balance sheet.

As an ancillary benefit, simply going through this process can help keep you focused on managing the balance sheet. For example, an active focus on reducing the time it takes to collect accounts receivable can accelerate your cash flows and reduce bad debts. Both will reduce the amount of external financing needed to fund your growth.

Identify milestones and incentivize employees to achieve them

One of the primary benefits of creating forecasted financial statements is to create expectations for employees in carrying out their job functions that lead towards your long-term goals. By soliciting feedback from key managers and employees in the forecasting process you can create buy-in for the overall objective.

An important element of any growth initiative is incentivizing your key managers and employees to align their goals with your goals for the company. Ideally, the milestones on which you base incentives should be a challenge to achieve, but also attainable, objectively measurable and based on things which your employees can affect.

The costs of these incentives should be included in your forecasted financial statements.

Monitor your progress

I recommend rolling financial statements for each of the next 12 months and then yearly financial statements from that point as far into the future as is practical. Each month you should compare your actual results with the forecasted financial statements to ensure the long-term goal is realistic and that you’re on target. If you’re not on target, or if circumstances have changed, you should update the financial statements to reflect your revised expectations.

Reviewing your progress monthly you will renew your focus on your long-term goals and improve your chances of success.

If you follow these recommendations you will find that your financial statements become less like a rearview mirror and more like a roadmap for growing your business. Clearly identifying your goals and monitoring your progress will give you peace of mind and the process will provide you with deeper insights into your business.