While financial statements can help the monitoring of a company’s performance, they may not provide enough information to determine financial health. Often, undisclosed liabilities and risks are important determinants. There are several ways a CPA can help stakeholders identify unrecorded items through either agreed upon procedures (AUPs) that target specific accounts or external auditing procedures.
The first step to revealing undisclosed liabilities and risks begins with an evaluation of what may cause an asset account to diminish. Factors like accounts receivable including bad debts or inventory including damaged goods can signal asset diminishment. Also, some fixed assets may require costly maintenance or repairs. Any of these situations could signal financial distress and impact financial ratios as much as unreported liabilities do.
Touring a company’s facilities or reviewing asset schedules for slow-moving items can be a good place to start when identifying problems. Benchmarking can also help. For instance, if receivables are growing much faster than sales, it may be a sign of aging, uncollectible accounts.
Identify unrecorded items
Other ways for CPAs to get information indicating poor performance off the balance sheet could be footnotes, when available. Other methods of finding information include warranties, pending lawsuits, IRS investigations, and an underfunded pension. These risks are significant but only appear on the balance sheet when they’re “reasonably estimable” and “more than likely to be incurred.”
It is likely that in-house accounting personnel will view liabilities as too unpredictable or remote to warrant disclosure, as these standards are subjective.
We can help
An external audit is the best way to defend your company against hidden risks and potential liabilities. If funds are limited, an AUP engagement can target specific high-risk accounts or transactions. We can help you gain a comprehensive look at your company’s financial well-being; contact us at 818-334-8623 or click here and we will contact you.