Reliability Of Financial Statement Data

»  Verify which statements are needed to assess all legal counterparties and credit bases: stand- alone; consolidated; parent.

»  Examine the types of statements: company prepared; compiled; reviewed; audited.

»  Ensure availability of most recent statements.

»  Ensure multi-year periods are sufficient for trend analysis (between 3-5 years).

»  Compare multi-year statements with lengths of typical business cycles.

»  Ensure availability of quarterly statements to assess seasonality effects.

»  Beware of the pitfalls and special considerations when assessing consolidated statements. (See note on the right)

»  Identify key events that might affect the interpretation of figures.

»  Identify any significant event post balance sheet date.

»  Achieve a balance between historical, current and future analysis.

When interpreting consolidated accounts you must consider the following:

»  The ‘group’ is not a legal entity. It may constitute the credit base but it is not a legal counterparty

»  Verify the consolidation method(s) used. Is it control (IFRS) or ownership?

»  Verify which entities form part of the consolidated group, and which are excluded.

»  Consider the need to potentially manually include or exclude certain entities on a pro forma basis.

»  Be conscious that the group may contain a mix of companies with different activities, currencies and accounting policies and auditors.

»  Identify any loss making parts of the group

»  Identify where are the majority of the assets, cashflows, and debt

»  Note that intercompany sales, loans, dividends and guarantees are eliminated in consolidated accounts

»  Associated companies/JV’s are not transparent. Minority interests may be misleading

»  What accounting standards have been used?

»  Verify key accounting policies used and changes over time.  

»  Identify changes in reporting periods, if any.

»  Identify evidence of cosmetic and/or creative accounting.

»  Verify existence & significance of off-balance sheet & contingent items.

»  Assess correctness of financial spreading internally and if done by third parties.

»  Identify a need to make statement adjustments to enhance comparability.

Consider accounting risk:

»  The risk that transactions are recorded contrary to generally accepted financial reporting standards, either through ignorance or by design

»  Ascertain reliability based on prior years’ reports and compare with actual.

»  Verify internal planning process.

For SME’s:
» Quality of data is generally lower quality.
» The higher financial risk needs to be mitigated by good understanding of the business and close monitoring.