At Tom Vignali CPA, Inc., we perform a variety of financial services. Recently, at the request of one of our strategic management associates, we were asked to perform a review of a potential client’s financial statements. We were provided with June YTD internal financial statements.
A preliminary review provided some valuable insights and as a follow-up, we requested monthly versions of the financial statements so we could evaluate particular trends. Again, a preliminary review provided additional valuable insights relevant to revenue categories and related direct expenses. To more definitively address what appeared to be some significant concerns, we reviewed the previous year-end financial statement and general ledger adjustments. What we discovered was both astounding and alarming!
Keep digging to get the real story
Normally, if this were one of our own client engagements, we would have requested and reviewed all of this data (and more) during our initial review process. However, that was not the case in this instance, which is why there were multiple requests for additional data to be reviewed.
What we discovered moving from the initial YTD review to the individual monthly financial statement reviews to the previous year-end financial statement and general ledger adjustments was the following:
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- Current monthly financial data was being posted in a timely and accurate fashion.
- Direct expenses were not being posted in a manner that allowed for a direct relationship to their respective revenue categories, thus preventing an accurate cost of goods/service sold ratio.
- Previous year-end unearned revenues had been moved from the previous year’s revenue category and entered into the new year’s first month’s revenue category. This skewed the revenues for the first month of the new year, and also skewed the ensuing YTD financial statements.
- Although cash accounts, bank accounts, A/R and A/P accounts were reconciled on a monthly basis, no other reconciliations or adjustments were made on a monthly basis, and all other adjustments/reconciliations would not be scheduled until the end of the calendar year in preparation for annual tax filings.
- There were numerous other financial data entry issues of concern.
Inaccurate monthly statements have domino effect
The ultimate result of not reconciling the monthly financial statements was that the first month’s financial statements drastically overstated revenues and profits, and this carried through to the mid-year YTD financial statements, as well. The client was not informed of potential losses and was not able to take any sort of corrective actions in “real-time” and would never be able to review accurate financial statements until final adjustments and reconciliations were made at year end. In fact, because this “problem” was unknown to the client, they had in fact thought that they were printing off and reviewing each individual month’s financial statements and were not aware of any major problems or losses that required their immediate attention.
At Tom Vignali CPA, Inc., we assist our clients with the preparation of timely and accurate financial statements on a monthly basis. This allows them to review accurate financial performance data in a timely manner and take corrective actions if required. In the example above, the client WAS reviewing their monthly financial statements, but the data was incorrect. This prevented them from realizing that there was a critical problem that required immediate attention.
It is critical that financial reviews be performed on a monthly basis. It is just as critical that the financial data being reviewed is accurate and reconciled to provide an accurate representation of the company’s financial position at that point in time.
At Tom Vignali CPA, Inc., we assist our clients with issues such as this to identify what is necessary to perform a timely and accurate financial analysis of the company. If you would like to further discuss this process, don’t hesitate to contact us at Tom Vignali CPA, Inc.
Contact Us:
Thomas W. Vignali CPA Inc.
118 Point Judith Road
Narragansett, RI 02882
T: (401) 415-0798
tom@tomvignalicpa.com
www.tomvignalicpa.com
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