Home builders should examine their accounting practices now to avoid potential trouble later. By BUILDER Magazine Staff
In light of the accounting scandals engulfing Arthur Andersen, Enron, and Global Crossing, Abba Blum, an accountant and home building auditor with Aronson and Co., recommends home builders discuss the following with their auditors:
1. Review your company's equity and debt structures. Verify that you have made adequate and transparent disclosure in your financial statements. Carefully review all joint-venture and partnership agreements to ensure that your company's true ownership percentage and true exposure to loss are properly reflected and disclosed in your financial statements.
2. Examine your company's current cash receipts and cash-disbursement procedures to identify potential possibilities for fraud and theft by your employees. Review your contract approval process to ensure that employees are pursuing the most favorable pricing for your company from subcontractors. Also, make sure you provide proper safeguards and on-site security to prevent materials theft on the jobsite.
3. Review your current acquisition and divestiture plans before implementation to minimize confusion during subsequent preparations of financial statements and income-tax returns.
4. With the auditor, analyze your company's current management incentive and bonus programs to verify that the arrangements are directly aligned with your overall strategic-growth and profitability objectives.
5. Review revenue-recognition policies to avoid prematurely recognizing sales while the company still has a risk of a loss.
6. Examine your property-acquisition risks. What outstanding purchase commitments or options does the company have? What procedures and methodology does it employ to evaluate what should be purchased through options and when options should expire?
7. In light of current trends in the economy, review your landholdings to ensure that the values disclosed on the financial statements are equal to or above market value.
8. Review with your auditors the changes resulting from the recent accounting pronouncements regarding the proper recording and reporting of Goodwill obtained in an acquisition.
9. Ascertain the percentage of revenue earned by your company's independent CPA from nontraditional sources, such as consulting and information technology services. A higher percentage toward traditional audit and tax services may indicate stability and the ability to withstand upcoming changes anticipated in the accounting industry.
10. Ask whether your independent CPA is familiar with the unique nature and nuances of the home building industry. If you decide to switch accountants, request a list of references of your CPA's home builder clients. Having someone familiar with the industry can save you big money.