Here is how to screw up your banking relationship. Send your internal financial statements to your bank without having a CPA review them first. Last week, I got a panicked call from Jim, who was in a meeting with his bank. The banker, who was in Jim’s office, had some serious questions about the financial statements they were reviewing together. I was in a meeting. So I couldn’t take his call immediately. After my meeting ended, I returned his call. Jim had given the bank financial statements that his internal bookkeeper, Jan (his wife), had printed directly out of QuickBooks.
Jan is a wonderful person, but she isn’t much of a bookkeeper. She doesn’t have a degree or certificate in accounting. She isn’t certified as a bookkeeper. Jan’s sole qualification as a bookkeeper consists of sleeping with the owner each night. Surprise, surprise, the financial statements that she produced were a mess. They have been a mess for years.
If you read my prior post about bookkeepers, you will remember the keys to the accounting kingdom. Every number on your balance sheet should match an amount in the real world. In other words, if your balance sheet shows $100K of accounts receivable, in the real world, your customers show owe you exactly $100K.
Jim’s bank had loaned about two million dollars to his business. Since the business had poor financial results for two years in a row, they were keeping a close eye on Jim, meeting with him quarterly. The financial statements that Jan had produced for the meeting were incorrect in every way imaginable. There was a non-existent bank account on the balance sheet with a large negative balance. Accounts receivable and payable were incorrect. There were a number of totally unsupported, large liability amounts on the balance sheet. One liability account showed that Jim’s business owed two million dollars to someone, but Jan had no idea to whom the money was owed. The only thing Jan had done correctly on the balance sheet was the reconciliation of the main checking account. The financial statements were unreliable in every way. The banker in Jim’s office was understandably alarmed. They had loaned two million dollars to a business, whose owner had no idea how his business was performing. Jim sent me the financial statements he had given to the banker. I couldn’t tell either how his business was performing. Over the next couple weeks, I will be working with Jim to fix his financial statements. However, his credibility with the bank has been irreparably damaged. Jim should fire his bookkeeper even if it ruins his sex life.
I am currently working on a set of June 2010 financial statements for Samantha’s business. I have made ten adjusting entries so far. I expect to have about twenty when I am finished. Some of the adjustments are for only a few thousand dollars. One of the adjustments is for almost a million dollars. Samantha’s bookkeeper is no prize either. At least Samantha isn’t sleeping with him. This is a large company. After making twenty adjustments, Samantha’s financial statements will be ready for the bank. Imagine what the financial statements looked like before I started working on them. At least Samantha had the good sense to have me look at and fix the financial statements before presenting them to her bank. Her credibility with her banker will continue to be good.
Unless you have a really good understanding of your financial statements, and are absolutely certain your internal bookkeeper is outstanding, you should have a CPA review your financial statements before sending them to any third party. By the way, your bookkeeper’s main qualification shouldn’t be sexual attractiveness. A little accounting knowledge would be nice. There is a reason banks require business customers to submit financial statements prepared by CPA’s. They know most internally prepared company financial statements are unreliable if not outright misleading. Keep your credibility with your banker. Make certain your financial statements are reliable by having your CPA review them regularly.
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