Management’s Role in Preparing Financial Reports

The management (CEO and financial officers) of a business must make sure that the financial statements and disclosures are adequate according to financial reporting standards, and that all the disclosure elements are truthful but, at the same time, not damaging to the business.

Whether a business is a small private company or a large public corporation, its annual financial report consists of

  • The three basic financial statements: income statement, balance sheet, and statement of cash flows.

  • A statement of changes in owners’ equity (if needed). This statement reports information regarding changes in owners’ equity accounts during the year that is not included in its three primary financial statements.

  • And more. In deciding what “more” means, the business’s CEO and top lieutenants play an essential role — which they (and outside investors and lenders) should understand.

The CEO does certain critical things before a financial report is released to the outside world:

  1. Confers with the company’s CFO and controller (chief accountant) to make sure that the latest accounting and financial reporting standards and requirements have been applied in its financial report.

    The president of a smaller private company may have to consult with a CPA on these matters. Recent years have shown a high degree of flux in accounting and financial reporting standards and requirements.

    A business and its auditors cannot simply assume that the accounting methods and financial reporting practices that have been used for many years are still correct and adequate. A business must check carefully whether it is in full compliance with current accounting standards and financial reporting requirements.

  2. Carefully reviews the disclosures in the financial report.

    This disclosure review can be compared with the notion of due diligence, which is done to make certain that all relevant information is collected, that the information is accurate and reliable, and that all relevant requirements and regulations are being complied with. This step is especially important for public corporations whose securities (stock shares and debt instruments) are traded on securities exchanges.

  3. Considers whether the financial statement numbers need touching up.

    The idea here is to smooth the jagged edges off the company’s year-to-year profit gyrations or to improve the business’s short-term solvency picture. The CEO should approve adjusting the financial statements in order to make them jibe better with the normal circumstances of the business.

    The manager must strike a balance between the interests of the business itself, and the interests of the owners (investors) and creditors of the business. Financial reports may have some hype, and managers may choose to put as much positive spin on bad news as possible without making deceitful and deliberately misleading comments.

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