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Why Financial Statements are Sometimes Suspect?
By Dr. Gary L. Bode; CPA, MSA, CMP
Medical practice financial statements have potential problems and are often suspect for several reasons.
First, they rely on unverified information from the practitioner. A practice’s internal bookkeeping, even with the highest of intentions, is often sloppier than an accountant might hope for. Professional liability with the IRS, and time constraints, keep the average accountant from doing anything but merely compiling figures given them. The standard disclaimer on their financial statements states this fact.
Second, most accountants are generalists in that they service other industries, like hog farms and flower shops; besides health care. Specialization developed in medicine and health care for a good reason – it became too complex for a single person to have a comprehensive grasp on all of it. The accounting industry has not followed suite. Thus, CPAs often have little direct experience in the health care professional space.
Finally, accountants generally limit their scope of service to interfacing with the government for you on tax issues. Therefore, their statements reflect tax position, which is only one component of the practice’s total financial condition. While important, this is hardly all your accountant is capable of doing.
Now, have you ever experienced a problem relative to the above post?
Practice Mgmt: http://www.springerpub.com/prod.aspx?prod_id=23759
Financial Planning: http://www.jbpub.com/catalog/0763745790
Risk Management: http://www.jbpub.com/catalog/9780763733421
Hospitals: www.HealthcareFinancials.com
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Filed under: Accounting | Tagged: Accounting in Medicine |
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The Phantom Net Income Problem
Yes, we had accounting problems and here is an example for emerging practitioners who wonder where all that net income the account says was made – actually is.
Most times, a true “cash” net profit never existed, as it was only a “phantom” accounting artifice for tax purposes.
This happens because depreciation often causes discrepancies between “check book” profit, which is how much cash you actually have left over after paying the bills, and taxable income.
Amortization is the same concept as depreciation but it applies to intangible assets, like medical practice goodwill.
Trust this helps.
Office Manager
Pam
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Income Statement Often Difficult to Interpret
Another problem of income statement interpretation is depreciation, and its relative, amortization
Depreciation merely takes the cost of a tangible asset, like equipment, and divides this expense into the successive time periods over which the asset is expected to help produce income.
Logically, if you’re trying to figure true practice costs, a piece of durable equipment often helps produce income long after it was purchased.
The Office Manager
Pam
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What is Goodwill?
Goodwill is basically the value of a medical practice as a going concern minus the book value of the assets.
In a mature practice, where accumulated depreciation has decreased the book value of the assets below true market value – and the reputation of the practice allows selling it for a premium price – goodwill can be considerable but not reflected on the balance sheet.
Shay
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More Poor Income Statement Characterizations
All good concepts above; but wait – there are even more!
For example, other illogical income statement categorizations may occur because: 1) the accountant does not understand your medical practice; 2) cannot or will not customize your accounts; 3) is only interested in the tax implications; or 4) has encountered a lack of proactive input from the doctor or medical practitioner.
Furthermore, if you have your accountant enter your checks into a software program, additional blending of categories can occur as low-level employees often incorrectly key in your information.
Such “blending” of categories negates any opportunity to objectively see where all the money goes. It makes cost containment and expense reduction initiatives difficult, and can increase or decrease actual practice “worth.”
FMV calculations and appraisals – for sale, retirement, merger or dissolution – also become extremely difficult … and expensive.
So, do it right, now – or get it wrong, later.
Thanks.
Dave
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