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Your business needs financial statements so management can monitor performance, attract investment capital and borrow money from a bank or other lender. But not all financial statements are created equal. Audited statements are considered the \u201cgold standard\u201d in financial reporting. While public companies are required to issue audited statements, smaller, privately held organizations have options. CPAs provide three other types of financial statements, which, in order of descending level of diligence, are: reviews, compilations and preparations.<\/p>\n
Here\u2019s some insight into the newest and most basic financial reporting service available to private businesses \u2014 preparations \u2014 and how these engagements differ from compilations.<\/p>\n
Preparations<\/strong><\/p>\n Financial statement preparations are often created as part of bookkeeping or tax-related work. While some lenders may accept preparations in support of small lending arrangements, preparations are generally reserved for internal<\/em> purposes to provide information on the business\u2019s current financial condition and as a basis of comparison against future accounting periods.<\/p>\n Preparations provide no<\/em> assurance regarding the accuracy and completeness of the financial statements. Assurance is critical if you plan to share the financial statements with third parties. Generally speaking, the greater the level of assurance, the more trust a reader will have in the accuracy and integrity of your company\u2019s financial statements.<\/p>\n In addition, professional standards don\u2019t require CPAs to be independent of a business when preparing its financial statements. In other words, it\u2019s OK for an accountant to have a financial interest in a company that he or she prepares financial statements for.<\/p>\n To avoid misleading any third parties who might receive a copy of these statements, each page of a prepared financial statement must include a disclaimer or legend stating that no CPA provides any assurance on the financial statements. In addition, prepared financial statements must adequately refer to or describe the applicable financial reporting framework that\u2019s used and disclose any known departures from that framework.<\/p>\n Compilations<\/strong><\/p>\n Like preparations, compilations provide no<\/em> assurance that the financial statements are accurate and complete. And independence isn\u2019t required when issuing compiled financial statements. But there are subtle differences when moving from a preparation to a compilation.<\/p>\n A compilation involves the issuance of a formal<\/em> report by a CPA who\u2019s required to read the statements and evaluate whether they\u2019re free from obvious material errors. The CPA\u2019s report appears on the first page, before the financial statements. If the CPA isn\u2019t independent of the business, he or she must disclose this fact in the report.<\/p>\n Notably, the use of a compilation of financial statements can extend beyond the business owner to third parties, including investors, business partners and lenders who may view the input of a CPA as beneficial.<\/p>\n Building for the future <\/strong><\/p>\n Preparations may be a cost-effective way for small business owners to monitor performance. But they provide limited usefulness as a business grows and needs to interact with third parties. Eventually, prepared statements may need to be upgraded to a compilation, review or audit to give stakeholders greater assurance about the company\u2019s financial results. Contact us to determine what\u2019s right for your current situation.<\/p>\n \u00a9 2022<\/em><\/p>\n <\/body> Your business needs financial statements so management can monitor performance, attract investment capital and borrow money from a bank or other lender. But not all financial statements are created equal. Audited statements are considered the \u201cgold standard\u201d in financial reporting. While public companies are required to issue audited statements, smaller, privately held organizations have options. […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13,7,10],"tags":[8,11,12],"class_list":["post-15848","post","type-post","status-publish","format-standard","hentry","category-aa","category-articles","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15848","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=15848"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15848\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=15848"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=15848"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=15848"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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