Certified Financial Statement: A Comprehensive Understanding
I. Definition and Importance
A Certified Financial Statement is a financial document that has undergone thorough auditing by an accountant and has received their certification as accurate. These documents, which often include income statements, balance sheets, and cash flow statements, are subject to Generally Accepted Accounting Principles (GAAP) guidelines during the auditing process.
These certified statements serve as a crucial pillar in the system of financial reporting checks and balances. Their certification enhances analysts’ confidence in their data, thereby allowing for more reliable valuations.
- Auditing and certification by external, independent accountants.
- Commonly include the balance sheet, income statement, and cash flow statement.
- Required for publicly-traded companies.
- The Sarbanes-Oxley Act of 2002 standardizes external auditing and necessitates an Internal Controls Report.
II. Deep Dive into Certified Financial Statements
Upon completion of an audit, a certified financial statement is furnished with an audit report. This report, delivered by a certified independent auditor, gives a written opinion on the audited financial statements and can spotlight key discrepancies or potential fraud.
Public Companies Requirement
Publicly-traded companies are mandated to have certified financial statements, owing to their significance in financial markets. While these companies may hire internal auditors for preliminary checks, final certification comes from an external auditor, usually a certified public accountant (CPA).
Investors demand assurance of accuracy in the financial documents upon which their investment decisions hinge. Thus, certified financial statements should be lucid and deliver a faithful depiction of a company’s financial health.
Past Frauds and The Sarbanes-Oxley Act
In the past, scandals like the Enron and Arthur Andersen case, which involved deceptive bookkeeping that led to inflated valuations, have demonstrated the havoc that can be wrought by dishonest companies and auditors.
In response to such scandals, the Sarbanes-Oxley Act of 2002 was implemented by Congress. The Act created the Public Company Accounting Oversight Board for independent oversight of public accounting firms conducting audits and set standards for them. The Act also requires auditors to include an Internal Controls Report with the financial statements, ensuring data accuracy within a 5% variance and confirming the existence of safeguards for financial data.
III. Types of Certified Financial Statements
The three most common types of certified financial statements are:
- Balance Sheet (Statement of Financial Position): Provides a snapshot of a company’s financial position at a specific point in time. It details the company’s assets, liabilities, and shareholders’ equity.
- Income Statement (Profit and Loss Statement): Summarizes a company’s revenues and expenses over a reporting period. It subtracts expenses from revenues to determine net income, resulting in a profit or loss.
- Cash Flow Statement: Reports cash inflows and outflows during a certain period. It categorizes activities into operating, investing, and financing, linking the balance sheet and income statement by showcasing how money moved during the period.
Further Resources and References
For readers interested in diving deeper into the topic of Certified Financial Statements and related issues, the following resources offer a wealth of authoritative information and valuable insights:
Websites and Online Resources:
- The U.S. Securities and Exchange Commission: This governmental agency offers a wealth of information on financial statements, auditing, and regulations like the Sarbanes-Oxley Act.
- Investopedia’s Guide to Financial Statements: This comprehensive guide provides a detailed look at different financial statements and their relevance in the world of finance.
- “Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports” by Thomas Ittelson: A clear, comprehensive guide to financial statements, ideal for beginners and experts alike.
- “The Sarbanes-Oxley Act: Costs, Benefits and Business Impacts” by Michael Ramos: An in-depth exploration of the Sarbanes-Oxley Act and its implications for businesses and financial reporting.
Academic Journals and Research Papers:
- “The Impact of the Sarbanes-Oxley Act on American Businesses” (Journal of Business & Economics Research): This paper discusses the effects of the Sarbanes-Oxley Act on businesses in the United States.
- “Auditing: A Journal of Practice & Theory”: This journal, published by the American Accounting Association, contains numerous research papers and articles related to auditing and financial statement certification.
Reports and Studies:
- “Report on the Sarbanes-Oxley Act of 2002” (SEC): This report provides an in-depth analysis of the Sarbanes-Oxley Act.
- “Study on the Adoption of the International Financial Reporting Standards (IFRS) in the United States”: This study investigates the potential for the United States to adopt international financial reporting standards.
Professional Organizations and Associations:
- American Institute of Certified Public Accountants (AICPA): A professional organization offering resources and information for CPAs, including standards and guidelines for auditing and financial reporting.
- The Institute of Internal Auditors (IIA): An international professional association for internal auditors, providing standards, guidance, and education.