There’s no getting around the fact that accurate financial statements are imperative for every business. Publicly held companies are required to not only issue them, but also have them audited by an independent CPA. Audited financial statements provide the highest level of assurance to third-party users that the documents in question are free of material misstatements.
There is good news for privately held companies, particularly small businesses. That is that you may not need to incur the cost or undertake the effort that goes with formally audited financial statements. There are other less expensive and less arduous paths to follow.
True to its name, a financial statement preparation is simply the product of an accountant preparing a set of financial statements in accordance with an acceptable financial reporting framework. It’s usually done as part of bookkeeping or tax-related work.
A preparation provides no assurance of the accuracy and completeness of the financial statements in question. And assurance is typically critical if you plan to share the financial statements with third parties such as lenders and investors.
That said, some lenders may accept preparations in support of small lending arrangements. However, more often than not, preparations are used only for internal purposes. This is to provide a business’s leadership with information on the company’s current financial condition and as a basis of comparison against future accounting periods. In fact, professional standards don’t even require a CPA to be independent of a business to perform a preparation.
When preparing financial statements, ensure each page has a disclaimer. This clarifies that no CPA assures accuracy. Also, vividly describe the financial reporting framework used. Don’t forget to disclose any known departures from this framework.
If you want to fortify the trust of potential third-party financial statement users a little more, consider a compilation. Similar to a preparation, a compilation creates financial statements. It follows a reporting framework but gives no assurance on accuracy.
The primary difference is a compilation includes a formal report by a CPA attesting that this professional has fully read the financial statements and evaluated whether they’re free from obvious material errors. If the CPA isn’t independent of the business, this fact must be in the report disclosure as well.
The use of a compilation can extend beyond the business’s leadership to third parties such as:
However, many third parties might still insist on some level of formal assurance to accept your company’s financial statements.
We’d be remiss if we didn’t mention there’s another level in between audit (highest assurance) and preparation and compilation (no assurance). That would be a financial statement review, which an independent CPA will review. This accountant will provide limited assurance that no material modifications should be made to the financial statements in question. If you need an accounting company to help deciding which level of financial statement services is right for your business, please contact us.