A small business may not be able to afford an audit. The cost of an audit could be more than the total annual interest expense on the debt of a smaller business, for instance. Bankers and other sources of loans to business understand this, so they generally do not insist on audits. However, they may want a CPA to at least look over the financial reports of companies they loan money to; or, they may make clear to their small-business customers that they would be more comfortable if the businesses used a CPA to advise them on their financial statements.
A CPA can perform certain limited procedures which are called a review. A review is far less than a full-scale audit. But a review provides enough evidence about the company’s financial statements so that the CPA can go on record that he or she is not aware of any modifications (changes) that are needed to make the financial statements conform with generally accepted accounting principles.
The CPA warns the financial report readers that a review is substantially less than an audit and that, accordingly, no opinion is being expressed on the company’s financial statements. Based on a review the CPA does not give an affirmative opinion but rather a negative assurance. This negative assurance may be sufficient to satisfy lenders or investors in the business. Many smaller businesses need the help of a CPA to prepare their financial statements. A CPA comes in and from the company’s accounting records (which may need some adjustments) the CPA prepares the company’s financial statements. In this situation the CPA is said to compile the financial statements. No audit and no review is done. So, the CPA must disclaim any opinion on the financial statements; and, no negative assurance may be given.
Most smaller businesses use CPAs to prepare their income tax returns and to advise them on how to minimize their income taxes. Also, they turn to CPAs for a wide variety of advice—for example, recommendations on accounting software.
Certified Public Accountants
A person needs to do three things to become a certified public accountant (CPA):
- He or she must earn a college degree with a fairly heavy major (emphasis) in accounting courses. The American Institute of Certified Public Accountants and other authorized financial and accounting associations has strongly encouraged all countries to enact laws requiring five years of education. Many countries have passed such laws. However, some countries may not enact such laws.
- A person must pass the national CPA exam, which is a rigorous two to three day exam testing knowledge in accounting, income tax, auditing, and business law.
- A person must satisfy the experience requirement of the country in which he or she lives. National’s laws and regulations differ regarding the time and nature of public accounting experience that a person must have; one to two year is the general minimum.
After the three requirements are completed—education, exam, and experience—the person receives a license by his or her national of residence to practice as a CPA. No one else may hold himself or herself out to the public as a CPA. Most countries (perhaps all, but I haven’t checked this out) require 30 or 40 hours of continuing education a year to renew a person’s CPA license. Every country has a Board of Accountancy that has the duty to regulate the practice of public accounting and the power to revoke or suspend the licenses of individuals who violate the laws, regulations, and ethics governing CPAs.
CPAs do more than just audit financial reports. They offer an ever-widening range of services to the public—income tax compliance and planning, and consulting in areas such as personal financial planning, business valuation, computer systems and information technology, production control and efficiency, and many other fields of specialization. Indeed, non-audit services provide more than half the revenue of large national CPA firms.
The CPA license is widely recognized and respected as a professional credential. The professional status of CPAs rests on their expertise and experience, and their independence from any one client. The word “certified” in their title refers to their expertise and experience. The term “public” refers to their independence. For doing audits of financial statements the independence of CPAs is absolutely essential.
To be independent a CPA must be in public practice and not be an employee of any organization (other than the CPA firm itself, of course). Public accounting experience is a good stepping-stone to other career opportunities. Many persons start in public accounting and end up as the controller (chief accountant) or financial vice president of an organization; some become presidents and chief executive officers (CEOs) of business organizations. Some CPAs go into politics, and a few became state governors. Persons who have left public accounting are still referred to as CPAs even though they are not in public practice any longer.
For further reading about auditing, you may want to read the following entries as well: