A CFO looks over financial reports.

How a CFO Ensures Compliance in Financial Reporting

How a CFO Ensures Compliance in Financial Reporting

Reliable financial statements are crucial for business management, but ensuring compliance may feel like a luxury in the resource-constrained world of small business. How can a small team hope to achieve the quality of a public company? Yet missteps in compliance can lead to severe consequences, including bad decisions, financial penalties, and a loss of credibility amongst your investors. 

How can a small business ensure compliance in reporting without overspending on accounting staff and audits?

A good fractional CFO evaluates your organization’s compliance requirements and risk, ensuring the appropriate financial reporting controls without overspending. Read on to learn how CFOs perform this evaluation and what compliance looks like in small businesses.

What is Financial Statement Compliance?

In general, financial statement compliance involves adhering to established standards and regulations, such as Generally Accepted Accounting Principles (GAAP) and the Financial Accounting Standards Board (FASB) guidelines. These standards ensure that financial statements are consistent, comparable, and transparent. A financial audit is the only legal method of assuring statements are prepared in a manner consistent with these principles. 

Most small businesses cannot afford the expense of an annual financial audit; instead, they settle for lesser forms of compliance such as reviews, compilations, or simply internal controls. Without a financial audit, your CFO alone manages all financial compliance risks. The size of this risk depends on:

  • Any external investors or lenders
  • The size and complexity of your business
  • Whether you plan to sell your business in the next five years

Publicly listed businesses must comply with additional requirements such as Sarbanes-Oxley and SEC regulations. Those regulations typically do not apply to small businesses and will not be discussed in this article.

How Does a CFO Help Businesses Stay in Compliance?

The responsibility of financial compliance falls squarely on the CFO of any organization – both legally and in everyday practice. To ensure compliance, fractional CFOs deploy a collection of policies and best practices within the organization, including:

  • Establishing financial controls
  • Fostering a culture of compliance
  • Performing internal audits
  • Engaging external audits

Establish and Execute Controls

A fractional CFO’s most important day-to-day responsibility is maintaining robust internal controls. Controls are procedures and policies designed to ensure accuracy and reliability in financial reporting. Examples of controls include:

  • Process Checklists: Your CFO should implement process checklists for month-end and year-end closing activities. These checklists ensure that all necessary steps are completed and reviewed. For example, each team member could sign off on completed tasks, providing accountability and traceability.
  • Segregation of Duties: Your CFO should minimize the risk of errors and fraud by separating duties amongst staff. For example, the bookkeeper who enters vendor bills should not be allowed to initiate vendor payments. 
  • Spending controls: The CFO should establish clear rules about who can spend money through which channel. For example, any expense over $1,000 may require written purchase order approval by a manager.

Foster a Culture of Compliance

Compliance is not just about following rules – compliance is a mindset where accuracy and integrity are paramount. Your fractional CFO is the cultural compliance champion and should lead your organization toward impeccable integrity. This includes:

  • Training and Education: The CFO should provide ongoing training to the finance team about new regulations, risks, and financial compliance requirements. This should include regular workshops and seminars.
  • Lead by Example: A CFO must lead by example, demonstrating a commitment to ethical practices and compliance. When the finance team sees their leader prioritize compliance, they are more likely to follow suit.
  • Celebrate the right behaviors: The CFO should encourage transparency by thanking whistleblowers, encouraging dissenting opinions, and celebrating the discovery of mistakes – even if it throws off timelines or creates extra work.

Perform Internal Audits

Regular internal audits are essential for identifying and correcting issues before they become significant problems. Internal auditing is coordinated by the fractional CFO but performed by everyone in the finance team to ensure accountability. 

The CFO should establish a schedule for internal audits, periodically covering different aspects of financial operations (such as revenue recognition, inventory, payroll, and purchasing). These audits should assess compliance with internal controls and regulatory requirements.

After each audit, the CFO should review the findings or reporting errors with the finance team and develop action plans to address weaknesses. This continuous improvement approach helps maintain high standards of financial reporting.

Engage in External Audits

If you can afford an external audit, they will objectively assess the company’s financial statements and compliance. Best-in-class fractional CFOs welcome auditors as an essential assurance and learning opportunity. (If your CFO dreads the annual audit, you should consider whether they are the right professional for your growing business.)

Good CFOs have little work to prepare for audits because financial compliance is built into their monthly processes. Support schedules and work papers should be audit-ready every month, easily available, and easily understood by outsiders. 

Your fractional CFO’s confidence in going into an audit primarily reflects their confidence in monthly compliance.

The CFO is your compliance champion.

A CFO plays a vital role in ensuring compliance in financial reporting. Remember, a proactive and diligent approach to compliance prevents issues and builds trust and credibility with stakeholders.

A fractional CFO will help ensure compliance with your business’s financial statement. Contact us today for more information.

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