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The majority stockholder of a small corporation tells you, the company’s CPA, to “forget about preparing that cash flow statement” because he needs to take financial statements to the bank immediately. “Besides,” he says, “we have more cash in the bank now than we did last year at this time.” As the controller for the company, you are required to comply with Generally Accepted Accounting Principles (GAAP). As an employee, you need to comply with the boss.
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In your role as company controller, discuss what you should do to comply with both masters. As part of your discussion, explain what is missing from the majority stockholder’s understanding of how the statement of cash flows is used, for decision-making by both internal and external entities.
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Solution Preview
In this problem, the CPA is not acting as an independent auditor because the CPA is an employee of the corporation. Granted that the CPA is still required to comply with the ethics and provisions of being a licensed CPA, but the financial statements prepared for the bank will not have the same credibility as those which might have been prepared by an independent CPA.
What that means is that the financial statements will have a qualification stating that the CPA is not independent with respect to the statements. That’s point one.
Secondly, the financial statements can certainly have another qualification about the missing Statement of Cash Flows. There is nothing wrong with omitting any part of the financial statement package provided the …
