As we start work with a client, there are many times that the owner will say, “My accountant does not provide me advice on my business, they only compile my statements and do my taxes”. What most business owners do not understand is that in most cases, they are only paying their accountant to perform those two tasks when they visit them once a year. In order to provide you advice on your business, the accountant would need to come in and learn more about your business in a lot more depth than your accountant does for what they are doing now. To fully understand this, it is imperative to understand the difference between financial accounting and management accounting, along with what functions you are asking your accountant to perform.
Financial Accounting Financial accounting is for presenting the financial position of your business to its external stakeholders in order to understand the health of your business. External stakeholders can include your Board of Directors, other stockholders, investors or lenders. Your financial statements represent the results of your business over a specified time period and are used to compare present results to your past results to see if how your business is performing. Financial statements reporting is based upon what has happened, so they are ‘backwards’ looking.
As a private corporation, your financial accountant creates financial statement compilations (Notice to Reader). Your compiled financial statements are then used as the basis of calculating your business income tax. Your accountant may make recommendations based on the information you provide them, but they are not going digging into your financials to uncover any issues or misclassification or any wrongdoings – that would be done through an audit or review and is not what you are paying for when you ask them to compile your statements. The reports they provide with the compiled statements do not provide an opinion or give any assurances that the statements are in accordance with Generally Accepted Accounting Principles (GAAP). In some cases, an investor or lender may require you to have an audit or review which will require the financial accountant to go through your financials in detail to provide some level of assurance that the statements are free from material mistakes and fairly represent the operations of the company.
It is very important that when you review financial statements that you look at the beginning of the report to see one of 4 things:
Notice to Reader – done with compilations, or
Review Engagement Report – no audit opinion rather a statement of belief that statements are in accordance with GAAP, or
Audit Report - provide the user with the auditor’s opinion regarding the statements presentation is compliant with GAAP, and
Compilations are signed by a professional accountant such as a CPA, CA; CPA, CMA or CPA, CGA and that the review or audited statement are signed off by a Licensed Public Accountant usually a CPA, CA; CPA, CMA or CPA, CGA.
Management Accounting Management accounting is used by business owners and other management to make decisions concerning the day to day operations in your business. Management accounting is based on current and future trends and does not require exact numbers to be used. Because you often have to make decisions in a short time period through a fluctuating environment, management accountants rely heavily on forecasting of markets and trends when working with you. Management Accounting combines accounting, finance, and management with professional insights and methods.
Unlike financial accounting where financial statements reporting is based upon what has happened; management accounting makes use of these statements combined along with analytical tools and techniques and will focus primarily using ‘forward’ looking analysis and reporting suited to what management needs.
Financial Accountants and Management Accountants It is important to understand your requirements and your expectations when you hire or engage an accountant, as well as understand what functions they are able to perform for your business. Not all and in fact most do not perform all functions. In some cases you might have a financial accountant to compile your statements and help you file your business taxes. You might then need to engage a management accountant to come in and help you with functions such a performing feasibility studies or helping you with functions such a budgeting, pricing, costing, productivity analysis, or profit analysis. In many cases you will have accountants that will perform some functions of each based on their background and clientele. If you have an accountant that performs all of the functions you require, it is essential that you engage them for all the purposes you require. As with any professional you hire, they are not going to just provide you with advice on a particular issue with your business when that is not what you have hired them to do.