[IMGCAP(1)]All too often in the practice of accounting we are predominately attentive to adhering to the concepts and conventions promulgated by the “accounting gods.”
We rightfully are preoccupied with important accounting issues, such as revenue recognition, materiality, adequate disclosure and assessment of risk.
Therefore, it is understandable that we may have placed certain “basic business assumptions” on the back-burner. With that in mind let’s revisit some of these assumptions:
Assumption #1: No One Goes into Business to Lose Money
Seems obvious but is as basic a business concept as there can be. This notion provides accounting and business professionals with the underpinnings of revenue recognition and the going concern assumption among others. We cannot recognize revenues or costs unrelated to the entity’s mission nor can we apply the accrual concept if “business life expectancy” is in serious doubt.
Assumption #2: You Cannot Manage What You Cannot Measure
How often have we heard the comment, “That firm is not doing so well”? The question must be asked how you keep track of the activities of an entity without being able to measure results in a meaningful way. Sales alone are inadequate. We need to know how many units we sold, at what price, at which location, during which period, along with a myriad of other relevant information.
Assumption #3: No Margin, No Mission
For our not-for-profit (NFP) brethren this assumption is foremost. Unless total sources of revenue exceed total costs, the NFP’s future sustainability will be in serious jeopardy. An NFP should not have to defend earning a profit at the end of a period but must be held accountable for failure to achieve minimal financial success.
Assumption #4: Stats are Just as Important as Dollars
The metrics or statistics that each and every entity uses to measure their financial activities are just as important as the dollars ascribed to their units of production. Restaurants use the number of “chits,” hospitals use discharges, automakers use cars sold, accountants use billable hours. The list is long and varied. A reliable measure of activity is important to every entity regardless of their industry.
Assumption #5: Accountants are Financial Reporting Critics
Very much like movie or play reviewers or sport commentators, accountants provide an intrinsic value over and above the report they render. To be successful, a financial/business person must
Think like an accountant:
Be inquisitive—ask a lot of questions.
Be skeptical—do not take an answer at face-value.
Be on guard—expect that a client or interested party may not be totally forthcoming.
Trust but verify—believe what is said only when probably documented.
Assumption #6-Accounting and Finance Use a Special Language
Business professionals use their own special language; for example, a fixed asset is not an asset that at one time was broken. Therefore, it is incumbent that those interested parties who are seeking information for different purposes be furnished timely, reliable and relevant information.
The four major categories of interested parties in the financial performance of any entity include:
Managers: the internal management that relies on adequate financial reporting for decision-making purposes
Investors: the outside capital providers who are most interested in a return on their investment;
Creditors: the lenders who want assurances that their principal plus interest will be paid;
Regulators: federal, state and local regulatory entities that have the responsibility of overseeing an entity’s performance both financially and for the benefit of the broader economic community.
Ultimately what we do as accountants is dependent on numbers. Regardless of our intent to objectively present the information, the reader or user will apply their own subjective interpretation of the data presented.
Here’s a short example: In early 2014 the CEO of a significant organization, while presenting the year-end final results to his board of directors, made the following pronouncement: “In 2013 our revenues increased by a third over 2012 compared to a decline of 25 percent in 2012 versus 2011. This was a great accomplishment!”
In fact 2013 revenues were $100 million, 2012 revenues were $75 million and 2011 revenue were $100 million. The CEO’s statement was true but misleading—further underscoring the need for adherence to the assumptions itemized above.
Charles J. Pendola, CPA, Esq., FHFMA, FACHE, CMC, CFE, CFF, CGMA, is director of the Office of Graduate Management Studies at St. Joseph's College in Patchogue, N.Y.