There are three levels of financial statements, which best serves your needs? Most business clients need some level of financial statement reporting by their CPA. There are three levels: Compilation, Review and Audit. At Fragnoli & Company, CPAs in Brentwood, TN, we are frequently asked to report on financial statements and the client is unsure of what level of reporting they need. Additionally, many third party users throw out the terms like “audited financials prepared by CPA” when they really don’t mean audited financial statements.
As stated above, there are three levels of reporting performed by a CPA Firm. Note, I said reporting. Remember, the financial statements are prepared by the client and then reported on by the CPA. If the CPA prepares the financial statements then the Firm is no longer independent and can only issue a compilation report on the financial statements and must state that the firm is not independent with regard to the reporting. Compilations are just that, compilations. The CPA is not expressing any assurance with regard to the content of the financial statements other than that they have been prepared in accordance with Generally Accepted Accounting Principles (GAAP) or some Other Comprehensive Basis of Accounting (OCBOA) such as cash or tax basis. The next step up from compilation is the reviewed financial statements and this level provides limited assurance as to the content and the proper reporting basis and will have full disclosures. This is a more comprehensive reporting basis and more expensive, but it gives a higher degree of assurance to the user of the financial statement that the numbers are properly presented and accurate. The highest level of reporting, and the most expensive, is the audit. This level of service requires extensive field work, analysis and verification to be performed by the CPA firm. The firm is giving its highest level of assurance in the report that the financial statements clearly report the results of operations and financial condition of the company.
The key questions for your company are what are how are you utilizing the financial statements, how comfortable are you with the internally prepared financial statements and how much do you want to spend to have an independent CPA report on said financial statements. At Fragnoli & Company, CPAs, we ask our clients to think ahead as to the purpose and use of the financial statements we are asked to report on. For example, if there is an exit plan and intentions to sell their company in the next two or three years, then they may want to consider a higher level of reporting such as a review or audit versus a compilation. This will give the prospective buyer greater assurance with regard to the numbers. However, if the client is using them for internal analysis only and possibly complying with lending provisions of the bank, then a simple non-disclosure compiled financial statement might suffice and is considerably less expensive.
So if you are looking at having an independent CPA report on your financial statements, be sure to ask yourself the right questions and discuss the service in detail with your CPA and do not be pushed to a level of reporting higher than your needs. If you have any questions with regard to this service please feel free to call our firm, Fragnoli & Company, CPAs in Brentwood, TN at (615) 377-0705 and we would be happy help you answer the question; financial statements, which best serves your needs?