Other Tools for Financial Control Although budgets are the most common means of financial control, other

useful tools are financial statements. ratio analysis, and financial audits.

Financial Statements A financial statement is a profile of some aspect of an organizations financial circumstances. There are commonly accepted and required ways that financial statements must be prepared and presented. The two most basic financial statements prepared and used by virtually all organizations are a balance sheet and an income statement. The balance sheet lists the assets and liabilities of the organization at a specific point in time, usually the last day of an organizations fiscal year. For example. the balance sheet may summarize the financial condition of an organization on December 31, 2008. Most balance sheets are divided into current assets (assets that are relatively liquid, or easily convertible into cash), fixed assets (assets that are longer term in nature and less liquid), current liabilities (debts and other obligations that must be paid In the near future). long-term liabilities (payable over an extended period of time), and stockholders equity (the owners claim against the assets. Whereas the balance sheet reflects a snapshot profile of an organizations financial position at a single point in time, the income statement summarizes financial performance over a period of time, usually one year. For example, the income statement might he for the period January I. 2008, through December 31, 2008. The income statement summarizes the firms revenues less its expenses to report net income (profit or loss) for the period. Information from the balance sheet and income statement is used in computing important financial ratios. Ratio Analysis Financial ratios compare different elements of a balance sheet or income statement to
one another. Ratio analysis is the calculation of one or more financial ratios to assess some aspect of the financial health of an organization. Organizations use a variety of different financial ratios as part of financial control. For example. liquidity ratios indicate how liquid an organizations assets are. Debt ratios reflect ability to meet long-term financial obligations. Return ratios show managers and Investors how much return the organization is generating relative to its assets. Coverage ratios help estimate the organizations ability to cover interest expenses on borrowed capital. Operating ratios Indicate the effectiveness of specific functional areas rather than of the total organization. Walt Disney is an example of a company that relies heavily on financial ratios to keep its financial operations on track

Financial Audits Audits are independent appraak of an organizations accoumI ng. financial, and operational s ems. lhr iwo major types of financial audits are the external audit and the Internal audit. External audits are financial appraisals conducted by experts who are not employees of the organtzation.- External audits are typically concerned with determ ining that the organizations accounting procedures and financial statements are coml)dcd in an objective and verifiable fashion. The organization contracts with a certified PUbIK accountant (CPA) for this service. 1 he CPAs riiain objective is to verif for stockholders, the IItS. and other interested parties that the methods by which the organizations financial managers and accountants prepare documents and reports are legal and proper. External audits are so important that publicly held corporations are required by law to have external audits regularly, as assurance to investors that the finant a1 reports are reliable.

Unfortunately, flaws in tlw auditing process played a major role in the downfall of Enron and several other major firms. The problem can be traced back partially to the auditing groups problems with conflicts of interest and eventual loss of objcct ivity. I-or instance, Enron was such an important clnt for its auditing firm, Arthur Andersen, that the auditors started kiting the firm take liberties with its accounting systems for fear (hat if they were too strict, Enron might take Its business to another auditing firm. In the aftermath of the resulting scandal, ArthurAndersen was forced to close its doors, Enron is a shell of its former self. indictments continue to be handed down, and the accounting profession is being redefiiwd.3

Some organizations are also starting to employ external auditors to review other aspects of their financial operations. For example. some auditing firms now sprciahzr in checking corporate legal bills. An auditor for the lireinans Fund lniiraiice Company uncovered several thousands of dollars in legal Ice errors. Other auditors are beginning to specialize in real estate, employer benefits, and pension plan investments. Whereas external audits are conducted by external accountants, an intern al audit is handled by emploecs of the organization. hs obfriivr is the same as that of an external audit-to verify the accuracy of financial and accounting procedures used by the organization. Internal audits also examine the efficiency and appropriateness of linancial and accounting procedures. Because the staff members who conduct them are a permanent part of the organization. iniernal audits tend to be more expensive than external audits. lut employees, who are more familiar with the organizations practkes. ma also focus on significant aspects

of the accounting system besides Its technical correctness. large organizations like llillihurton and lord have an internal auditing staff that spends all its time conducting aLitlils of different dlv isIo,ls and functional areas of the organliatrnn. Smaller organliations may assign accountants to an internal audit gniup on a temporary or rotating basis. The findings of an i,iiernal auditor led to the recent finamial scandal at Wor$d(.nrn. The flrms new (E() asked an internal auditor to spot-check various records related to capit4l expenditures. She subsequently discovered har the firms chief financial officer was misapplving major expenses: Instead of treating then) as currrnt exiws. he was treating them as capital expenditures. This treatment. in turn. iiade the firm look much more profitable than it reall was. The CEO was fired, hut it will take Vorld( om a kng lime to sort nut the $3.8 billion It has 54) far found to have been handled iniproperly.4

Financial auditing is an accounting process used in business. It uses an independent body to examine a business' financial transactions and statements. The ultimate purpose of financial auditing is to present an accurate account of a company's financial business transactions. The practice is used to make sure that the company is trading financially fairly, and also that the accounts they are presenting to the public or shareholders are accurate and justified. The results of the financial auditing procedure can be presented to shareholders, banks and anyone else with an interest in the company. One of the main reasons for a financial audit is to ensure that the trading company is not practicing any deception. This is the reason that the financial auditing body is an independent third party.