Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2 (Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2.pdf), страница 6

As corporations grow larger,different areas of the company are often decentralized into departments or divisions whose performance ismeasured separately. These divisions are headed by managers who do not have their personal wealth at stakein the corporation.

Managers attempt to achieve specific targets laid out by the board of directors or. by theshareholders of a small corporation. Often, these guidelines are integrated into the results presented in thefinancial statement and are set up by owners or shareholders in an attempt to align the efforts of managerswith their own interests. Frequently, bonus programs are offered to managers to obtain this alignment, thebonuses being based on such established benchmarks of financial performance as net income. While themanagers may have a different set of goals in mind, such as job security, the bonus program focuses theirattention on the results reported in the Financial.statemenls.Moreover, the professional (nonowing) manager of public corporations must be responsive togovernment regulations. One of the most important of these regulations is supplying financial andnonfinancial information to shareholders.

Therefore, the objectives of the non-owning managers includeproviding a "report card" on their activities for the purposes of both earning compensation and complyingwith information requirements of shareholders, investors, lenders, and regulators.The opportunity to prepare one's own report card creates temptations that are difficult to resist. As GeorgeFoster states in Financial Statement Analysis, "No matter how detailed the set of rules issued by accountingpolicy bodies, creative managers or their advisers will find means of structuring transactions that do not giverise to reported expenses or reported liabilities even though, in spirit, expenses or liabilities exist. This is butone of several reasons why the disclosures in annual reports need not represent either a complete or an unbiased representation of the underlying transactions and events affecting the firm.Throughout a financial statement analysis, the analyst must remember that the statements are those ofmanagement and that accountants reviewed them only to see that they conform to broad standards and meetcertain statistical tests of validity.

In the preparation of the financial statements, owners and managers have agreat deal of leeway by which they can make themselves look good. One way management can make itsefforts look better is to choose the best time of the year for preparing the statements. For instance by havingthe fiscal year end in the summer, when inventories and receivables are much lower than in December (theirpeak), retail businesses can produce financial statements that indicate a more favorable financial condition.15Examining the Auditor's OpinionAuditors review financial statements to test whether they are in accordance with the principles andpolicies promulgated by the Securities and Exchange Commission and by the Financial Accounting StandardsBoard.

In contrast management is templed to prepare the financial statements to present the company'sperformance in the most favorable light. Another pressure helping to make the results of an audit relativelymuddy is the auditors' desire to continue to be the accounting firm for the business they are auditing.

Becauseof these factors, the result of an audit is more appropriately described by the word fair than it is by the wordfinancial analysts would like to see: accurate.After examining the financial statements of management, auditors must express an opinion on the qualityof the statements.

Four types of opinions are given: unqualified opinion, qualified opinion, disclaimeropinion, and adverse opinion.An unqualified opinion means that the management receives the highest accolade for presenting fairly thefinancial position and results of operations and changes in financial position for the period involved".Footnoted disclosures accompanying an audited statement may result in significant information beingavailable to a firm's creditors. In effect, the footnotes allow the auditor to comment on the statements relativeto the GAAP standards.

A financial statement that the auditors have declared to conform to GAAP standardshas the best credentials that an analyst can obtain. Securing such a financial statement should be required forevery unsecured loan request overThe audit itself does not prevent' management from misrepresentation. In conclusion, the accountant'sjob is a complicated, maybe even impossible, one. Although many regulatory authorities attempt to keep financial reporting to investors at a high standard, financial statements need to be approached from a waryperspective.A qualified opinion means that the statement present fairly the financial position and results of operations,but that there are certain qualifications about the scope of the auditor's engagement at the audited firm or thatthere arc uncertainties about the future which cannot be resolved or the effect of which — cannot be,estimated. These reservations, usual phrased "except for" and "subject to".A disclaimer opinion means that because of limitation in the score of the auditing firm's engagement orbecause of uncertainties about the future that cannot be resolved or the effect of which cannot be estimated,the accountants cannot express an opinion.

A disclaimer opinion includes the review and complication opinions, which means that the auditors consolidated the statements and prepared the acknowledgments withoutindependently verifying the data, an important part of any audit.An adverse opinion means that the statements do not present fairly the financial position or results ofoperations in conformity with genera]ly accepted accounting principles. This type of opinion is rarelyencountered.For analysis purposes, the qualified opinion is comparable to an unqualified opinion and, depending on thereason for the qualification, is usually suitable.

A financial statement with the disclaimer opinion would beconsidered unaudited, but could be prepared substantially in accordance with GAAP and should be treated asdiscussed in the next section. The adverse opinion is of questionable value.Unaudited StatementsAudited financial statements differ from unaudited statements in one highly important way-the degree ofconfirmation of asset, liability, sales, and expense account balances.

For example, in the normal course of anaudit engagement, inventory levels are physically sampled, and statistically selected accounts receivable areconfirmed.Confirmation is not done, or is not done with the same thoroughness or independence, in the preparation ofunaudited statements.Many firms do not have their financial statements prepared by an outside accountant or accounting firmbecause they claim not to be able to justify the cost of a full audit, approximately $15,000 or more.

Instead,statements are generated in house from books and records that have not been independently verified. Thefollowing questions may be suggested to the credit analyst: How experienced or competent is the preparer? Are the financial records of the firm accurate and complete? Have all the liabilities been identified and reported? Even if the person who prepares the information is qualified and the data are both available andreliable, how independent is the preparer?16The professional standards .of certified public л .accountants require independence from the client ordisclosure of business or family relationships that might inhibit the exercise of independent judgment..

Thepresence of audited financials (and their implications) gives a certain comfort level to the creditors of theenterprise. The reliance by creditors on analysis of less than audited statements needs to be' clearlyunderstood, and the bank must be protected with collateral or personal guarantees of the owners or otherappropriate consideration.A readily available alternative source of financial information is the firm's income tax return submitted tothe Internal Revenue Service. Some play down the accuracy of these returns, claiming that the income errs onthe conservative side. Nevertheless, these statements are prepared for- the IRS, which will prosecutefraudulent submissions.