CPA firms offer a variety of services to help small businesses with financial reporting requirements. Audits, reviews, and compilations can help your business secure a loan, satisfy regulatory rules, or entice new investors. These services can be pricey, so it’s a good idea to understand what each entails before you commit.
If you need to prove to another party that your financial statements are accurate, an audit is the way to go. During audits, CPAs analyze your accounting records and study the documentation for your transactions. After finishing this research, the CPA issues an opinion. If he likes what he sees, he’ll give you an unqualified opinion. This means that he believes that your financial statements comply with generally accepted accounting principles in all material respects.
When an Audit Is Necessary
All publicly traded companies are required to send audited financial statements to the SEC on an annual basis. If you see a public offering in your future, you’ll need an audit the year you IPO and all subsequent years. The federal government and state governments may require an annual audit if you accept funding from them. If you want an especially large business loan and the bank sees your company as high risk, the loan officer may ask for audited financial statements.
When an Audit Is Worth It
An audit is the highest level of assurance you can obtain from a CPA. Because the stakes are high, the CPA has to spend a lot of time reviewing your transactions — which most likely means a large bill for you in the end. Because audits can be so costly, most small businesses don’t get them unless they absolutely have to. However, audited financial statements may make the difference in getting a loan approval and can even get you a lower interest rate.
A financial review is similar to an audit, but not quite as rigorous. When conducting a review, the CPA expresses limited assurance about your financial statements. Rather than digging through documentation, the CPA performs basic analytical procedures to double-check that the financial statements make sense. The best opinion you can get from a review is simply that the CPA is not aware of any material departures from GAAP.
When a Review Is Necessary
It’s fairly common for lenders to request a review before they issue a small business loan. If the loan contains ongoing financial requirements — known as loan covenants — you’ll probably need to provide reviewed financial statements for every year that the loan is outstanding.
When a Review Is Worth It
If you want a CPA stamp of approval on your financials, but aren’t required to get a full-blown audit, a review can be a good option. Because there’s less assurance provided in a review, the CPA spends less time reviewing your books and passes that savings along to you. Reviews can be a helpful tool if you’re trying to woo new investors or are looking for a buyer for your business.
During an audit or a review, you prepare your financial statements and your CPA reviews and expresses an opinion about them. During a compilation, your CPA assists you in preparing the financial statements but doesn’t opine on their quality or accuracy.
When a Compilation Is Necessary
The American Institute of CPAs [PDF] believes that compilations are best suited for very simple accounting situations. For example, a compilation may be appropriate if your business uses the cash method of accounting and needs to translate that to the accrual method. If your company is small and your transactions are straightforward, a lender may accept this in lieu of a financial review for a loan application.
When a Compilation Is Worth It
Compilations aren’t very time intensive and are generally much cheaper than audits and reviews. Unfortunately, sometimes you get what you pay for. Although you’d hope that compiled financial statements comply with GAAP, your accountant has no obligation to ensure that they do. You’re essentially paying for the right to say that a CPA has helped you put together financial statements. But for a report to existing investors, or to obtain a new business insurance policy, that may be all you need.