What Are Compiled Financial Statements?

The Process of Compiling Financial Statements

Compiling financial statements involves several steps, with both the organization and the Certified Public Accountant (CPA) playing crucial roles:

1. Initial consultation:
   • The organization reaches out to a CPA firm to create compiled financial statements.
   • The CPA provides a detailed engagement letter outlining the scope and responsibilities.
2. Data collection:
   • The organization gathers financial records, which may include:
     • Ledgers and trial balances
     • Bank statements and reconciliations
     • Receivables and payables reports
     • Asset records
     • Debt documentation
   • For organizations using accounting software, secure access may be granted to the CPA.
3. CPA examination:
   • The CPA assesses the completeness of the provided information.
   • They arrange the data into appropriate financial statement formats.
   • Additional clarifications or documents may be requested if needed.
4. Statement creation:
   • Using the provided data, the CPA prepares the company’s financial statements.
   • Typically, this includes balance sheets, income statements, and cash flow statements.
   • The CPA ensures alignment with relevant financial reporting standards.
5. Internal review:
   • The CPA checks for apparent errors or inconsistencies.
   • Any significant issues are discussed with the organization’s management.
6. Client review:
   • Draft financial statements are presented to the organization’s leadership.
   • Management provides feedback and any necessary corrections.
7. Finalization:
   • The CPA incorporates agreed changes.
   • A compilation report is prepared that clearly states the limited scope of the work.
8. Submission:
   • The CPA delivers the completed financial statements and compilation report.

Throughout this process, the CPA’s role is to organize and present the provided financial information, not to verify its accuracy. The organization remains responsible for the correctness of the information and resulting statements. While the CPA may highlight obvious issues, they don’t perform audit procedures or offer assurance on the financial statements. Instead, the compilation heavily relies on the organization’s records and management’s representations.

How Does a Compilation Differ from an Audit or Review?

Compilations, reviews, and audits represent a spectrum of financial services that provide increasing levels of scrutiny and assurance. Reviews offer limited assurance through analytical procedures and inquiries and provide more credibility than compilations but less depth than audits. Audit services, the most comprehensive option, involve detailed testing and verification, offering the highest level of assurance and often meeting regulatory, investor, or lender requirements. The choice between these services depends on the organization’s needs, stakeholder expectations, and regulatory requirements, with each option balancing depth of examination against cost and time investments.

A business should consider a compilation over an audit or review in specific scenarios, and here are some examples:

• Small businesses applying for loans where only minimal financial reporting is required,
• Nonprofits providing statements to their board or donors,
• Family-owned businesses that need financial reports for internal use.

Compilations are also useful for organizations focused on budgeting or financial planning without external regulatory requirements.