What An Owner Wants The CFO And Auditors To Know
by Kristian Barr
Senior Care Industry Update, January 2008

In light of the recent financial scandals of this decade, we have seen increased priority on accurate and transparent financial reporting as well as a more detailed audit process that focuses on the risks of material misstatement. Sarbanes Oxley (SOX), while it is the most well-known change, has proven to be merely the tip of the iceberg. The focus of SOX was, and continues to be, SEC registered companies. However, thanks to SAS 104 - 111 (in particular, SAS 109), auditors of private companies and not-for-profit organizations are now required to gain a more complete understanding of the accounting processes and internal controls of their clients. All of these changes are the result of the profession’s attempt to give the owners of the company what they want: Financial data that is accurate and easily comparable to that of its competitors and other companies.

While accurate and understandable financial information is really the goal of all parties involved in the process, Owners have additional expectations of their auditors and CFOs that may not be as apparent. This article will attempt to identify and address those expectations:

Keep them informed. One of the CFOs main responsibilities is to keep owners informed on anything that could have a significant impact on the Company’s financial performance. This could mean reporting difficult information on various issues, such as declining margins, rising costs, or difficulties in complying with debt covenants or financial reporting standards. While it may not be the responsibility to report to the Owner directly, the CFO does have a duty to report to the CEO and Board of Directors on all financial aspects of the business.

The same holds true for the auditors. Owners rely on the auditor to be the independent third party who can objectively look at various aspects of the business (financial performance, internal controls, fraud risks, etc.) and provide insight on how things can be done more efficiently. Again, while an auditor does not have the specific responsibility to report directly to the owners, they are required to provide formal communication to “those individuals charged with governance” (usually the audit committee or the Board of Directors) on many items. These include significant audit adjustments, significant deficiencies in internal control, and any disagreements with management to name a few. This consistent stream of information from the CFO and the auditor is invaluable to an owner in making informed business decisions to help his/her business thrive.

Stay abreast of the standards. Auditors are looked upon as the experts in financial reporting and in the industry. While the CFO also has a responsibility to continuing education, he/she will often lean on the auditors as the technical experts when determining how to apply new financial reporting standards. At the end of the day, owners rely on both the auditor and CFO to be financial gurus so they are free to oversee other aspects of their business.

Be open to findings. Most owners know that there is always room for improvement in their businesses. Most owners also have an expectation of their auditors to not only provide assurance, but to help improve the overall control and reporting practices of the organization. To that end, SAS 112 has attempted to assign levels of priority to these findings by defining them as either material weaknesses or significant deficiencies. This has resulted in additional findings during the audit process that may place an uninformed CFO or Owner on the defensive. While most owners are open to these findings, it is the auditor’s responsibility to maintain good communication with the CFO and the audit committee in order to reduce any anxiety caused by reporting findings under the new standard.

Consider and communicate the risks of fraud. While the auditor is not obligated to look for fraud specifically, SAS 99 requires that auditors consider the risk of fraud and plan procedures that specifically address those risks. Owners expect to be involved in this process. Not only should an auditor get owners’ perspectives on the risks of fraud, but also should not hesitate to communicate risks that have been identified by others within the company. CFOs should also make similar evaluations and design controls that specifically mitigate fraud risks. In making these evaluations, the CFO needs to get the right people involved, which may include getting an owner’s perspective on fraud risks and how to minimize those risks.

What owners and investors want from their auditors and CFOs:

• Timely, accurate, and understandable information is key in making informed business decisions
• Take the time to stay informed on current laws and regulations that have an impact on the business or financial reporting.
• Recognize that there is always room for improvement and be open to change.
• Keep the lines of communication open, no matter how difficult the issue.