What Are Compiled Financial Statements?

A compilation of financial statements is a service that a CPA provides where financial data from a company’s management is organized into a formal financial report. A compilation doesn’t involve any testing or verification of the information, so it’s a cost-effective option for smaller businesses or nonprofits that don't need a higher level of assurance.

While compilations don’t offer an opinion on the accuracy of the financial data, they still help organizations present clear and structured financial information for internal or external use. At SSL Associates, we offer customized financial statement compilation services to help clients meet their reporting needs without the complexity or cost of an audit.

Why Do Companies Need a Financial Statement Compilation?

Businesses and organizations often need financial statements compiled in several scenarios:

Internal Assessment

Compilations are a cost-effective way for management to gain a clearer view of their financial standing. As a result, companies can evaluate their financial position and make informed decisions about future investments and growth strategies without the expense of more detailed assurance services.

External Stakeholders

Current or potential investors, creditors, and other external parties may request compiled financial statements to assess the company's financial stability and determine its creditworthiness. For small businesses and nonprofits, compilations are a means to demonstrate financial responsibility and transparency.

Compliance Requirements

In some cases, regulatory bodies or lenders (like banks) may require businesses to submit compiled financial statements to ensure compliance with specific financial reporting standards. This is especially relevant when external parties need organized financial data but don't need the rigor of an audit or review.

Benefits of a Compilation for Small Businesses and Nonprofits

Compilations offer significant benefits for small businesses and nonprofits. They’re a way to present organized financial statements without the expense and rigorous examination of an audit or review. These compilations use management-supplied information and adhere to relevant financial reporting standards like GAAP (Generally Accepted Accounting Principles), ensuring industry compliance.

The absence of detailed analytical procedures or extensive testing makes compilations faster and more cost-effective. This suits organizations needing to showcase their financial status without the necessity for audited or reviewed statements. Nonprofits find this particularly useful when sharing financial information with stakeholders or seeking grants, as it fulfills basic reporting requirements without the complexity of certified financial statements.

What Does a Compilation Report Include?

A compilation report provides a structured presentation of a company's financial information that’s formatted under accounting standards. However, the CPA doesn’t verify the accuracy or completeness of the data.

The report typically includes:

• The company’s balance sheet, which showcases the organization's financial position at a specific point in time, highlighting its assets, liabilities, and equity.
• The income statement, also known as the profit and loss statement, it outlines the organization's revenues, expenses, and overall profitability over a defined period.
• Cash flow statement, which is based on information provided by management.

The CPA’s role is to organize this data into a clear, understandable format, but he or she will not provide any assurance or opinion regarding the reliability of the 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.