Financial Statement Certification

Financial statement certification plays to companies' inherent strengths of operating effectiveness, profitability monitoring and regulatory compliance. Put more simply, businesses certify their financial results to show investors and regulators that their operations are profitable and abide by the law. Publicly traded companies rely on external auditors to certify corporate financial statements.

Definition

Financial statement certification helps a company indicate the accuracy and completeness of its accounting data summaries. It involves regulatory maneuvering, auditing expertise and financial acumen. Corporate leaders take sound measures to create an occupational framework conducive to timely financial reporting and regulatory conformity. They reach out to financial reviewers to look into corporate financial processes and accounts, providing specific guidance on ineffective or illegal mechanisms. By law, only certified public accountants can review and certify the books of publicly traded firms.

Control Tests

The road to financial statement certification goes through control testing and verification. A control is a set of procedures that management puts into place to prevent operating losses. These may result from inaccurate journal entries, fraud and technological malfunctions. By testing and verifying financial controls, auditors help a firm avert regulatory turmoil or investor exodus. Regulators looking into a company's processes may fine the firm if operating mechanisms run afoul of the law.

Tests of Balances

Financial auditors testing account balances do not shrug off corporate management's assertions that accounting reports are accurate. They simply want to double check performance numbers and ensure completeness in financial reporting. Balance testing is key in financial statement certification because inaccurate or incomplete balances lead to wrong accounting reports. In verifying account balances, auditors watch closely journal entries involving financial accounts, such as assets, liabilities, equity, revenues and expenses.

Risk Assessment

Auditors assess financial risks to see how department heads contend with operating exposures and run efficient businesses. By doing so, reviewers make sure significant risks do not go undetected and ultimately throw corporate finances off kilter. Risk assessment involves looking at all four financial statements and determining how operating exposures could generate wrong numbers in these reports. It also covers risk rating, an exercise in which auditors rank risks as "high," "medium" and "low," depending on the loss expectation. Financial statements include a balance sheet, a statement of income, a statement of cash flows and an equity report.

Reporting

After testing internal controls and account balances as well as assessing risks, auditors give corporate management the green light for financial statement certification. Reviewers do so by issuing a report in which they express an opinion on the accuracy of accounting results. Positive audit reports are also called unqualified reports, unlike adverse audit conclusions.

References

• Jackson State University -- College of Commerce & Business Administration: Audit Responsibilities and Objectives
• Oregon State University: Audit Responsibilities and Objectives
• National Science Foundation: Financial Statement Audit
• Texas Department of State Health Services: Financial Statement Certification
• University of Cincinnati: Securities Lawyer's Desk Book: Section 906 -- Corporate Responsibility for Financial Reports
• AuditNet: The Internal Audit Process From A to Z: How it Works!