bonus breakdown: audits vs. reviews vs. compilations.
by ed mendlowitz
77 ways to wow!
one of my clients generously gave me his take on the benefits he received from the audited financial statements we issued for him. i was appreciative of this and want to share his views with you.
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he began with an introduction explaining how he started his business and shepherded its growth by concentrating on developing his services and delivering them quickly and on time to his clients. the business grew rapidly, and little time was spent on the recordkeeping except for getting invoices to the clients or making payroll, while keeping the back office as lean as he could. at the same time there were legal, regulatory, hr, occupancy and tax issues from operating in multiple states and countries and he was spending quite a lot of time and fees on these activities, because he had to, while pushing aside and neglecting the accounting work.
because of his company’s success, a dire need developed for additional capital, and no one would speak to him without the appropriate financial statements. that is when he reached out to us. we assessed the situation, developed a plan and timetable and sent in a team to organize his system and get him what he needed. we did and he reaped the expected benefits. the benefits also came because of his business model, client base and delivery of his services.
he told me about the many users of his financial statement and how it helped him.
- management: he and his management group now had credible information about the operations and their financial position. in addition to the basic financial statements there were many supporting and ancillary schedules and analyses that helped them in managing the business and creating usable budgets and projected statements including a reasonable five-year forecast that served as a viable benchmark for targeted goals.
- early-stage investors now had reports on how their funds were used and where the company stood.
- prospective investors were able to assess the current operations and developing trends and along with the projections they were able to take positions in the company providing needed funds for growth. the financial statement was also useful in establishing a beginning point for valuing the business.
- employees gained comfort that the company had a clear direction where it was headed.
- the board of directors were given materials they were able to use to better advise management and were able to be much more effective. the time they previously spent chastising management for the lack of reliable financials and current information was converted to time better spent on positive guidance. the financial statement also provided insights that the company’s resources were being used wisely.
- customers were assured that the company was on a solid ground to be able to continue the great service they have become accustomed to and were relying on.
- suppliers are creditors. some were provided with the financial statement to support increased credit limits and assurance that the company had the ability to pay its bills on time.
- bankers were not previously providing any funding because of the lack of financial statements. they were now able to participate, reducing the need to give up equity to investors for those funds.
- the accountants were better able to provide tax strategies that increased cash flow and to provide additional services that tightened controls, improved systems and to have delivered timely and more relevant financial data.
- government regulatory bodies in this client’s case do not receive audited financial statements to determine if the company is operating within prescribed guidelines. however, we explained that while taxing agencies typically do not receive audited reports, they could be helpful in income tax audits should one arise.
financial accountability mattered. besides the above benefits it provided a broader landscape, greater controls and more effective procedures, and set in motion a pattern of solutions-based recognition. it also put the company in a position to attract key personnel, possible merger candidates, a presentation to potential acquirers (which they were not considering but kept the door open to dialogues), companies they could collaborate with, technology and marketing consultants who could suggest systems that could move the company forward, and a strategy to achieve better client service, organic growth and customer referrals.
he called us in because he needed the reports and got so much more; he got control over his company. audited statements do matter and provide benefits far more extensive than what appears from the 25- or 30-page report. if you are a growing business, discuss with your accountant the advisability of an audit.
financial statement reports
the most frequently prepared reports by cpas are audits, reviews and compilations. here are descriptions and differences of each. note that some of these are continuously being changed so before using them, check out the current information.
audits
an audit of financial statements (which is sometimes referred to by the general public as a certified report) is the highest level of financial statement attest reporting and only independent cpas can perform this service. the purpose of an audit is to provide reasonable assurance that the financial statements are free of material misstatement.
an audit includes examining on a test basis documentation supporting the amounts and the notes in the financial statements; assessing the accounting principles used and significant estimates made by management; as well as evaluating the overall financial statement presentation. during the audit, the cpa obtains third party evidence; performs analytical and ratio analysis; and makes inquiries of management to determine if the information contained in the financial statements is free from material misstatement
the procedures are performed using generally accepted auditing standards (gaas) and the report states whether the financial statements have been prepared under generally accepted accounting principles (gaap) or another accounting framework.
auditors are responsible to assess the risk of material misstatement, whether due to fraud or error and management has a duty to design policies and procedures to help prevent fraud and to perform periodic internal reviews to ensure that transactions are recorded properly by their staff.
users place the highest reliance on audited statements.
reviews
review reports provide limited assurance that the financial statements are free of material misstatements.
a review consists of principally inquiries of company personnel and analytical procedures applied to financial data. it is substantially less in scope than an audit performed in accordance with gaas.
during a review, the cpa will perform some analytical procedures and ratio analysis and ask questions of management about items contained in the financial statements that appear to be different than expected and to determine whether they became aware of any material modifications that should be made to the financial statements for them to be in conformity with the appropriate accounting reporting framework. review reports will contain a complete set of notes to financial statements, as do audited reports. the accountant must be independent.
compilations
compilation reports provide no assurance that the financial statements are free of material misstatements. a compilation consists of presenting in the form of financial statements information that was submitted by management. during a compilation, the cpa will “read” the financial statements to determine if they appear to be free from obvious material misstatement. financial statements which have been compiled may or may not have to include notes to financial statements. if notes to financial statements are not included, that fact should be specified in the compilation report. the person or firm issuing the compilation does not have to be independent but if they aren’t, their lack of independence must be stated in the report.
other financial statement and reporting and attestation services
besides the traditional services described above, cpas also may be asked to prepare prospective and forecasted statements, organizational budgets, personal financial statements, or other reports such as for construction bonds, letters of credit, third party guarantees and sec and finra regulation compliance and forensic audits and special engagements designed to uncover or inhibit fraud.
additional information
the basic financial statement services have been briefly described. if you would like additional information, consult with the professional standards.