Preface: Financial statement assurance is not equal. Work with a CPA you trust for accurate financial statements.
Financial Assurance
Accountants have two types of assurance – positive and negative. Positive assurance is the wording in the report that obtains reasonable assurance with sufficient appropriate evidence to determine that the financials conform in all material respects with the specified criteria. The specified criteria must be sufficient in quantity and evidence obtained, e.g. Generally Accepted Accounting Standards. The criteria in positive assurance requires collection and review of adequate financial isotopes to fit the risk profile and requirements of the attest work. The quality of positive assurance varies from CPA firm to firm and largely upon the experience and expertise of the staff on the project. Positive assurance is not equal.
For instance there are numerous smartphone networks. If all you need is a smartphone to make calls why shouldn’t you purchase the lowest cost? Simple. First let’s consider why you need a smartphone for business. The reason for the smartphone is to make phone calls, check email, and manage your business. Should you travel you need a smartphone network with the positive assurance to make or receive a call from any location. Low cost Wi-Fi phones will not suffice in this instance. Why try to save $10 or $30 dollars a month on your smartphone when you could miss a $20,000 or $200,000 sale with a faulty connection or missed call. In this instance it doesn’t make sense to save a few dollars. You need a superior phone network, and it makes financial sense to pay. If and when you need the smartphone in one of those cannot afford to miss moments, you will not regret paying that extra cost of an additional $150 or $500 per year. You pay it because you need the greatest level of positive assurance a phone network can provide – communication with clients, customers, and friends. CPA attest work is similar.
Attest work in your financial statements should receive the same level of appreciation as your smartphone. Shop to find a CPA firm that cares about your business; a firm that provides you the extra attention you need to identify financial weather trends early, i.e. don’t keep fishing when you should get out of the boat, e.g. keep up with the Beijing trends. If you need to obtain positive assurance, make sure it really is positive assurance. You can get a self-service audit if that’s what you want – – an auditor will drive into your parking lot, drive around the building and sign-off on the statements with positive assurance, while you did all the work. But you certainly don’t do business like that, and neither should you prepare your financial statements without proper due diligence. You can, on the other hand obtain a full buffer wax and tire shine audit with positive assurance. It will cost a lot more, but you have the confidence someone reviewed your records with appropriate level of observation, inquiry, analytical procedures, and documentation to results in an opinion that provides a reasonable level of positive assurance. You know when you get self-service or buffer wax financial statements.
Assurance results from the precision in your financial oversight. Positive assurance states that the financial statements are prepared in accordance with applicable accounting standards and appropriate procedures. Negative assurance is limited assurance that the work on the financial statements was sufficient to make a plausible opinion that the financial statements are free of errors or material misstatements. Lack of precision or in incompleteness in the nature or extent or timing of procedures won’t limit negative assurance, i.e. nothing has come to our attention that makes us think the financial statements are not accurate. Only the highest level of attest work will provide positive assurance. Good positive assurance requires a lot work from your CPA.
An accountant can never say that financial statements are 100% accurate, but they can perform a level of work to provide reasonable assurance or limited assurance that the numbers on the financials are the true balance sheet and income statement representation for the business.
When you need financial statements, ask more than CFO question, e.g. “What will it cost”? Ask the college tuition question, e.g. “Will this lead to better (business) opportunities (and help us make proactive decisions and get proactive insights) in the future?