What underpins financial statements?

Aboard member or senior executive may have no direct involvement in bookkeeping, to use that old-fashioned term. In large organizations, accounting systems churn away, and the CIO or CTO (chief information or technology officer) is responsible for the reliable operation of IT, the computing systems and the resultant delivery of reliable numbers and reports. However, all responsible executives, certainly all statutorily appointed (eg under UK company law) directors, have a fiduciary duty with respect to the company. This means that they are all responsible for the 'truth and fairness' of financial accounts and by implication the underlying accounting records and the strategies that ensue.

The law must be obeyed and the requirement for true and fair financial accounts gives a compelling reason for faithful reporting of a company's transactions. Reliable accounting records exist to allow the CEO, executives and staff to manage assets and liabilities, and cash flows, and to deliver results as envisaged in the corporate objectives and supporting budgets. Reliable records need checks and controls and, while much checking has been passed to computer-actioned controls or, with online businesses, to the supplier or customer, executives must have confidence that there exists an appropriate and reliable system of internal controls. For US-listed companies this is a legal requirement, where executives have to certify each year.

Directors must be aware of their collective responsibility for finance in its widest sense. Directors need to get the most out of the CFO and the finance function. Good systems and procedures will help you deliver your strategy.

Links with strategy

To monitor and control strategy and tactics you need to know what is going on at the macro, overall level but possibly also at the micro level.

Understanding the record-keeping or bookkeeping process is not essential for many directors in non-financial roles; however, understanding the inherent simplicity of bookkeeping will give you another view of the balance sheet and P&L account. Bookkeeping is a business model, although today's standard setters would consider it inadequate without their accounting framework and definitions. Certainly the basic bookkeeping system could be abused and creative accounting undertaken if there were no definitive GAAP. Even if you do not have to, or do not wish to, get into detail, that being your subordinates' role, you do need to know that thoroughly reliable systems and procedures exist to deliver the reports upon which you can rely for strategy comprehension and delivery purposes.

Without reliable, 'true and fair' to use the British term, honest to be blunt, financial statements and reports, strategies can be neither implemented nor managed properly.

If you are concerned with strategy, presumably you have responsibilities that require you to have a role in ensuring that there is an appropriate corporate governance model to deliver your strategy. Are your strategies being faithfully reported and are they ethical?

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