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New meanings to your business financial statements
With the Enron financial crisis that occurred in the United States last month, one thing is clear-the importance and relevance of financial statements are often misunderstood and definitely underestimated. In the Enron case, the greed of the accounting firm over rode their primary role of skeptic and presenter of accurate financial results. Accountants have often been labelled bean counters and number crunchers. Often the financial reports and notes are meaningless to the average investor or business person. Both investors and business people alike plead ignorance to the language of figures. It has been justified to some extent since the language is often stinted and technical in nature.
Accounting students are taught "generally accepted accounting principals, debits and credits, ratios and margins" only to find that once finished school they are unable to communicate to the average business owner or investor. They might as well be speaking a foreign language. With the hot water the international accounting firm Arthur Anderson has found themselves in, I am sure that there will be repercussions to all the accountants. There will, no doubt, be more rules and regulations placed on the accounting community in order to protect the public. But the professors of accounting would better spend their efforts by training accountants and financial advisors on how to educate their clients on what the financial statements and notes really mean.
Many new clients I have encountered, both business owners and investors, do not know or, frankly, care what a debit or credit is, but what they are concerned about is their financial future. What do these financial statements really mean? How financially viable is my business? What direction is the business going? Do I have enough money to retire? How can I feel financially secure. These are the questions being asked. Accountants should be helping their clients by educating and training them to ask the questions they need to ask to understand their finances. Teaching them to play the role of skeptic and be wary of underlying trends or unreasonable results. The role of an accountant is to be a financial doctor to diagnose where it hurts and how to fix it.
It's unfortunate that Arthur Anderson's poor judgement will result in even more rules, more regulations and more unreadable language. But, we as financial advisors must remember, we are here to help serve the investment and business community. It is our role to act not just as accountants but as teachers and coaches to help our clients interpret and understand their financial results. To coach and help them manage their finances and, in some cases, to retrain old ways of money management where it is inappropriate. Never in my career have I felt that the accounting profession is more challenged to be different. And for a bean counter that's saying something.
Joyce Smith is president of JA Smith & Associates Inc. Certified General Accountants and Certified Financial Planners. The firm offers financial and tax planning advice for both individuals and business.
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