i. The accountant must have sufficient time to carry out his review. In tense and fast moving takeover situations the accountant may be asked to conduct a review, literally overnight. They must not allow themselves to conduct a review at a faster pace than the problem merits.
ii. It must be clearly established and made clear to all parties that the accountants are reporting only on accounting bases and the calculations as distinct from the assumptions including commercial assumptions.
iii. The accountant should only review the current period, and if a significant part of that has elapsed, then the next following period.
iv. Reporting accountants cannot relieve the directors of their responsibility for profit forecasts which may be used and relied upon by outsiders.
v. The accountant must establish the purposes for which the forecasts have been prepared.
vi. The accountant must be sure that the directors assume full responsibility for the forecasts by:
- A minuted board resolution;
- A statement to that effect in the document containing the forecast.
vii. The accountant must take note of the other advisers acting in the matter.
The main points to be considered in conducting the review:
i. Nature and background of the company's business. Establish its activities, products, customers, markets, labour force, prospectus, and the trends of its financial results.
ii. Accounting policies. Establish the accounting policies adopted for interim and final accounts and forecasts. Ensure that they are acceptable and consistently followed especially in the forecasts. Special areas to be watched include stock and work in progress valuations, depreciation, the method of taking profit on long term contracts, exceptional and extraordinary items, and deferred tax.
iii. The assumptions:
- These should be stated;
- The forecast should be consistent with the assumptions which may be economic (e.g. growth in G.N.P), financial (e.g. interest rate movement, marketing (e.g. market share), (e.g. output potential), labour relations (e.g. strike free periods) etc.
- The accountant is not concerned with the correctness of these assumptions although he should be sure the directors are responsible for them and that they are reported on by the advisers.
iv. The procedures adopted by the company to prepare the forecasts: the accountant should investigate:
a) Whether forecasts are regularly prepared for management or prepared only for this occasion.
b) If they are regularly prepared, the degree of accuracy and reliability achieved.
c) Whether the forecasts are best estimates, honestly believed to be achievable, or simply targets.
d) The extent to which forecasts for wholly or partly expired periods are covered by reliable interim accounts.
e) The extent to which the forecasts are built up from detailed divisional or activity based sectional accounts, distinguishing those with steady performance from those with more volatile results.
f) The treatment of material, extraordinary, and exceptional items.
g) The adequacy of provisions for future losses and contingencies.
h) The adequacy of working capital. If finance will be required to fulfil the forecast, this should have been arranged and confirmed.
This will be addressed to the directors and will contain:
i. A statement that the reporting accountants have carried out a review of the accounting bases and calculations on which the profit forecasts have been based.
ii. Specific identification of the forecasts and documents to which the report refers.
iii. If, as is likely, the accountants have not carried out an audit of estimated results of expired periods, a statement to that effect.
iv. Whether in the opinion of the reporting accountants the forecasts have been properly compiled on the basis of the assumptions made by the Board of Directors, as set out in the prospectus or circular, and are presented on a basis consistent with the accounting practices normally adopted by the company.
v. If the accountants have material reservations about any part of the forecast, they should qualify their report.