Saturday, July 17, 2010

How to Verify Financial Statements

Verifying financial documents is important for many reasons. For example, companies for sale may offer incomplete financial information for fear that a full disclosure could negatively affect the sales price. Or an entrepreneur applying for an unsecured loan could offer financial statements that inflate his income to qualify for the loan. Some people may also have reasons for under-reporting their income, especially in divorce or child support cases. Verifying financial statements is possible in several ways.

Instructions

    1

    Request audited financial statements signed by a certified public accountant. Further investigation of the financial statements is still necessary, but starting with audited statements offers initial verification.

    2

    Ask for bank statements to verify deposits. This is helpful for verifying income listed on financial statements. Also check bank statements for canceled checks and other payments to make certain actual expenses are in line with information included in the financial statements. This is important for preventing businesses from hiding expenses and making the business seem more profitable than it really is.

    3

    Ask for tax records in business deals. Also, ask for personal federal tax records for the owner, if applicable. Compare income and expenses listed on business tax returns against information in the financial statements. Obtaining the owner's tax returns is important if the business is a sole proprietorship. People with sole proprietorship businesses list business expense and income on their personal tax return.

    4

    Ask for W-2 forms from individuals, if necessary, to compare with personal information listed on financial statements. Also, ask individuals to provide more information about assets, such as the value of real estate they claim to own. Signed appraisals by licensed appraisers are helpful in verifying the value of assets.

    5

    Direct your accountant to review the audited financial statements, bank records and other supporting information for inconsistencies that you might have missed.

    6

    Order a forensic audit of the financial statements if your accountant finds inconsistencies.

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