If you are a business owner or someone handling company finances, you’ve probably heard the term “compilation of financial statements” tossed around. But what does it actually mean? Don’t worry you are not alone in wondering!
A compilation is the most basic level of financial statement preparation that a Certified Public Accountant (CPA) can provide. It’s all about turning your internal financial data into formal, easy-to-read financial statements without diving deep into audits or offering any assurance.
Compiled financial statements explained
Compiled financial statements explained: These are financial reports prepared by an external accountant usually a Certified Public Accountant (CPA) using data provided by a business. The CPA doesn’t audit or review the numbers but organizes them into clear financial statements, like the income statement and balance sheet. It’s a cost-effective way to present financials for lenders, investors, or internal decision-making, with no assurance given on accuracy.
How a Compilation Differs from an Audit or Review
In a review, the CPA goes a step further by applying analytical procedures and making inquiries to ensure the financials make sense.
An audit is the most detailed. The CPA not only examines your records but also tests internal controls, confirms balances with third parties, and assesses fraud risk. Audits provide the highest level of assurance but they also come with a higher price tag and time investment.
What’s Included in Compiled Financial Statements?
Even though a compilation doesn’t involve deep analysis or assurance, it still results in a full set of professionally prepared financial statements. These typically include:
- Balance Sheet: A snapshot of your company’s financial position, showing assets, liabilities, and equity.
- Income Statement: Also known as the Profit & Loss (P&L) statement, this outlines your revenues and expenses over a specific period.
- Statement of Cash Flows: A report on how cash enters and leaves your business through operating, investing, and financing activities.
- Statement of Retained Earnings: Shows changes in retained earnings across a reporting period.
When You Need Compilation of Financial Statements?
You’ll typically need a compilation when lenders, investors, or regulatory bodies request formal financials but don’t require an audit or review. It’s also ideal for internal planning or when preparing for loan applications, partnership deals, or contractor licensing. Compilations offer a cost-effective way to present financial information professionally especially for small to mid-sized businesses that don’t need assurance but want to meet external or compliance expectations.
Who Can Prepare Compilation: What Are Their Responsibilities?
Only a licensed CPA can prepare a proper compilation of financial statements. Their responsibility is to compile financial data provided by management into organized, GAAP-compliant statements. Importantly, they do not audit or verify the information; they simply format and report it. The CPA must also issue a compilation report, disclosing that no assurance is provided and that the data is based on what was supplied by the client. They must conduct the work by SSARS standards.
Key Benefits of Compiled Financial Statements for Businesses
- Provides professional-looking statements for lenders and investors
- Helps meet regulatory or licensing requirements
- Enhances internal planning with clear financial reports
- Saves money compared to audits or reviews
- Shows your business is organized and credible
- Ideal for small and mid-sized businesses
Common Scenarios That Require Compiled Statements
While not as rigorous as audits, compiled financial statements are often required in several practical situations. For instance, banks and lenders may request them when a business applies for a loan or line of credit to ensure finances are documented professionally. Government agencies or licensing boards like those overseeing contractors or real estate developers may also require compiled statements to verify compliance.
