'Management-Purposes Only' Financial Statements

In 1983, I prepared a paper called "The Case for a New Standard of Reporting -- 'Management Purposes Only' Financial Statements," which focused on the needs of small businesses. Copies of the presentation were forwarded to the then-chair of the American Institute of CPAs' Accounting and Review Committee and to the chair of the Auditing Standards Board's Levels of Assurance Task Force for their information and review. I was cautioned "that any changes in our literature or to recognize your position would not likely come quickly, inasmuch as the underlying concept would represent a fundamental change from the consistent posture that has been adhered to in prior standards."

In February 1985, The Practical Accountant printed an article that I wrote entitled, "AICPA Should Recognize Realities of Small Practice and Recognize 'Management Purposes Only' Statements."

Now, 27 years later, the Private Company Council is wrestling with the problem of reviewing and setting standards or modifications to address the needs of users of private company financial statements. Many of these private companies have little interest in raising capital from the public and are not publicly traded.

But these are not really small businesses.

There is no doubt that those "middle-market" businesses need relief from the current standards, and modifications of U.S. GAAP must be at the top of the PCC charts.

However, there seems to be little consideration or understanding of "Bill's Plumbing and Heating Company" or the "Side Street Food Market." These are the small businesses that are the forgotten people of the standard-setters. There are, perhaps, millions of these entrepreneurs in the United States, who, when in need of financing, are plagued by the same requirements that public companies must follow.

The cost of auditing and reviewing this type of small business is prohibitive, and many CPAs who used to do this work have discontinued it. At best, they now do compilations for their clients. These statements are not looked upon favorably by credit grantors.

The rules and regulations of GAAP have little bearing and meaning to the small-business owner, and should be recognized as unwarranted by credit grantors. To continue to burden small businesses with meaningless rules and regulations is discrimination of the worst kind.

And, of course, there is the cost to promote and publicize any new regulations. It took a long time and a tidy sum of dollars to get bankers and other credit grantors to accept the differences between audit, review and compilation, and it is somewhat understandable that the AICPA would not relish a repeat of the process.

But in fairness and in an effort to open credit lines to the "mom and pop" businesses, there must be a revision of the standards to help these organizations. Utilizing regulations for "middle-market" business organizations would not suffice for the small businesses of the nation. They deserve and must have rules and guidelines specifically designed for small business, not a warmed-over, somewhat-reduced version of the regulations that will apply to the larger, midsized private companies.

Perhaps it is time for a fundamental change from the consistent posture that has been adhered to in prior standards.And so, in an attempt to bring another point of view to the CPA profession, I have modified my 27-year-old comments and present them to fit the world of 2012 (and beyond).



Many CPAs, especially those in smaller practice units, perform write-up services for their clients. An integral part of these services is to prepare interim financial statements -- or, more properly, management reports -- for their clients' use in order to help the clients manage their business, to plan and analyze their tax situations, and to advise them of business problems and opportunities.

The information contained in these management reports may or may not contain all the normal accruals and adjustments that are necessary for the "standards of reporting" mandated by the compilation, review and audit procedures. Invariably, they do not include disclosures and footnotes, primarily because such disclosures serve no useful purpose in the circumstances for the client. The report may or may not contain a formal statement of changes, although the CPA will discuss at length, with the client, the usual question, "If I made a profit, where is it?"

The data is entered into the books and records by a bookkeeper or the CPA or a member of their staff. The books and records usually are kept on a computerized system, such as QuickBooks or any of theother computerized systems that are available on the market. The CPA will usually make whatever adjusting entries are necessary to present an accurate and meaningful report of the operation.

These reports contain the information needed by the client for successful business management. They are fashioned for the use and understanding of the client and provide the basis for fruitful, significant discussions between CPA and client. They serve a very important function for the business community and the CPAs that service small business. In short, they are specifically for use by management as a business tool.

Although these reports are not prepared for credit purposes, what more could a credit grantor want than to see the information that was specifically designed for the business owner? It is hard to believe that a CPA would prepare a statement that is meant to assist the client in the successful operation of the business that would not be welcomed by a credit grantor (even if it did not contain all of the disclosures that are ordained by GAAP).



We are proposing a practical solution to a practical problem. CPAs do provide a service to small-business management. They do issue interim reports for management use. That fact should be simply and clearly stated for all to know at a glance. A clear, concise statement can say it all -- without an offensive disclaimer or the necessity to hide behind the anonymity of a white paper.

A covering letter and a caveat at the bottom of each page of the report would alert the client - and anyone else who sees it -- as to the use and purpose of the reports. The covering letter should read: "We have prepared the accompanying management report for XYZ Company as of (date). The report is limited to presenting in the form of financial statements, information that is the representation of management, and does not include disclosures that are required by generally accepted accounting principles. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. This report is for management only. It is not intended for distribution or consideration for credit purposes."

The caveat on each page of the report could say: "Prepared for management purposes only, not for distribution or consideration for credit purposes."

Anyone reading the covering letter and caveats will understand immediately that these statements are for management only -- although they would contain information of interest to credit grantors. If they have any questions, a call to the CPA or business owner could resolve them in short order.



It has been suggested that "management-only" reports are disreputable because they do not come up to the currently mandated standards. This is a misleading issue, and one which has been created where there really is no issue. There is no suggestion that the existing standards of audit, review or compilation be watered down or eliminated.

They AICPA looks upon "management-only" interim financial statements in the context of third-party use. However, they are actually a report to management, and should be recognized as such. This type of report should be a new standard of reporting, accepted and promoted by the AICPA. The AICPA should recognize that there are many CPAs, a meaningful segment of the profession, who do write-ups and issue reports to clients for management use that do not purport to be financial statements in the sense that the AICPA, the Financial Accounting Standards Board, and other regulation-making bodies understand.



A new standard of reporting, "For Management Purposes," would remove the substandard reporting stigma that has been applied to write-up work. It would eliminate the concern that interim financial statements issued for management use might not meet accepted standards of reporting. It would do away with the need for disclaimers that suggest that the CPA has done little but transcribe numbers. It would elevate the level of understanding of the need for and desirability of this type of service. Above all, it would tell everyone -- clients, lenders and the public, as well as the CPA profession, that reports for management purposes are meaningful and can be relied upon.


Edwin J. Kliegman, CPA, is the founder of Marcum & Kliegman (now Marcum LLP) and a past president of the National Conference of CPA Practitioners.

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