What Is a Certified Financial Statement?
A certified financial statement is a financial document, such as an income statement, cash flow statement, or balance sheet that has been audited and signed-off by an accountant. Once an auditor has reviewed the details of a financial statement following GAAP guidelines and is confident the numbers are accurate, they certify the documents.
Certified financial statements are an important part of the checks and balances of financial reporting. The certification of financial statements increases analysts' confidence that they are getting good information from which they can draw their valuations.
- Certified financial statements are financial statements audited and certified by external, independent accountants.
- The three most common financial statements are the balance sheet, income statement, and statement of cash flows.
- Publicly-traded companies are required to have certified financial statements.
- The Sarbanes-Oxley Act of 2002 sets standards for external, independent auditors and requires that they submit an Internal Controls Report with certified financial statements.
Understanding Certified Financial Statements
A certified financial statement is a financial document audited and signed off on by a certified, independent auditor and is issued with an audit report, which is the auditor's written opinion about the financial statements. The audit report can highlight key discrepancies and detail suspected fraud.
Certified financial statements are required for publicly-traded companies as they play an important role in the financial markets. Companies may employ internal auditors to review financial statements, but they can only be certified by an external auditor, who is usually a certified public accountant (CPA).
Investors demand assurance that the documents they rely upon to make investment decisions are accurate and have not been subject to any material errors or omissions by the company that compiled them. Therefore, the certified financial statement should be clear and provide an accurate account of a company's financial performance.
In the past, large problems have been caused by dishonest companies working with dishonest auditors to "cook the books," which resulted in overstated profits and thus overstated valuations. Dishonest recordkeeping cheats investors and warps markets. The Enron and Arthur Andersen scandal is a prime example of how dishonest bookkeeping led to a disruption of the markets and the end of two industry giants.
The price of Enron stock at the time of its bankruptcy filing in December 2, 2001.
The Sarbanes-Oxley Act of 2002 was enacted by Congress in response to many corporate and accounting scandals, primarily the Enron scandal mentioned above. The act established the Public Company Accounting Oversight Board, which provides independent oversight of public accounting firms that conduct audits, stipulates that external, independent auditors conduct audits, sets standards for external, independent auditors, and established other requirements and standards.
As an added measure, this act requires auditors to submit an Internal Controls Report with the financial statements. The report shows that the data is accurate within a 5% variance and that safeguards are employed to protect financial data.
Examples of Certified Financial Statements
The three most common certified financial statements are the balance sheet, the income statement, and the statement of cash flows. The balance sheet, also known as the statement of financial position, provides a snapshot of a company's financial position as of a specific date, usually on Dec. 31. It reports a company's assets, liabilities, and stockholders' equity.
The income statement, also known as the profit and loss statement, provides a summary of a company's revenues and expenses for a reporting period. Expenses are deducted from revenues to determine operating income and the bottom line: net income. The result is either a profit or a loss, hence the alternate name "profit and loss statement."
The statement of cash flows reports the flow of cash in and out of the company during a specific period. The statement sorts activity into three main categories: operating activities, investing activities, and financing activities. The statement of cash flows connects the dots between the balance sheet and the income statement. It adds context by showing how money flowed in and out.