Compiled financial statements give businesses and nonprofit organizations a professionally presented view of their finances without the testing or assurance involved in a review or audit.
During a financial statement compilation, a CPA uses financial information supplied by management to help present the organization’s financial statements under an appropriate reporting framework. The CPA does not audit or review the information, verify every balance, or express an opinion on whether the statements are accurate.
That distinction is important. Compiled financial statements can be valuable for management, lenders, boards, investors, and other stakeholders, but they provide no assurance regarding the underlying financial information.
SSL Associates provides financial statement compilation services for businesses and nonprofit organizations in the Chicago area and nationwide. Our team helps clients organize their financial information, understand their reporting options, and select the appropriate level of CPA service.
What Is a Financial Statement Compilation?
A financial statement compilation is an engagement in which a CPA applies accounting and financial reporting expertise to assist management in presenting financial statements.
The CPA uses financial information provided by the organization and presents it in an appropriate financial statement format. Depending on the organization and reporting framework, the compiled financial statements may include:
- A balance sheet or statement of financial position
- An income statement or statement of activities
- A statement of cash flows
- A statement of changes in equity or net assets
- Notes or disclosures, when included
The resulting statements are accompanied by an accountant’s compilation report. This report explains that the CPA did not audit or review the financial statements and does not express an opinion, conclusion, or other form of assurance on them.
A compilation is therefore different from simply printing financial reports from accounting software. It is a defined professional engagement performed under applicable accounting standards and accompanied by a formal report explaining the scope and limitations of the CPA’s work.
What Does “No Assurance” Mean?
The most important characteristic of compiled financial statements is that they provide no assurance.
In a compilation engagement, the CPA is not required to:
- Test transactions
- Confirm account balances with outside parties
- Examine invoices, contracts, or supporting documents
- Perform analytical procedures
- Evaluate the organization’s internal controls
- Assess the risk of fraud
- Express an opinion on the financial statements
The CPA is not certifying that every number is correct. Instead, the CPA helps management present its financial information in an appropriate financial statement format.
However, this does not mean the CPA ignores obvious problems. The CPA reads the financial statements in light of the applicable reporting framework and the CPA’s understanding of the organization. If information appears incomplete, inaccurate, inconsistent, or potentially misleading, the CPA may request clarification or corrected information from management.
If management does not provide the necessary information or make appropriate revisions, the CPA may need to modify the compilation report or withdraw from the engagement.
Who Is Responsible for Compiled Financial Statements?
Management remains responsible for the financial statements and the information used to prepare them.
Before accepting a compilation engagement, the CPA generally obtains management’s acknowledgment that management is responsible for:
- Preparing and fairly presenting the financial statements
- Selecting an appropriate financial reporting framework
- Designing and maintaining relevant internal controls
- Preventing and detecting fraud
- Providing complete and accurate financial records
- Making significant accounting judgments and estimates
- Reviewing and approving the completed financial statements
This means the quality of the compiled statements depends heavily on the quality of the organization’s accounting records.
If accounts have not been reconciled, transactions are missing, or balances are incorrectly classified, those problems should be addressed before or during the compilation process. A compilation does not replace accurate bookkeeping or a reliable financial close process.
Do Compiled Financial Statements Have to Follow GAAP?
Compiled financial statements do not always have to be prepared under Generally Accepted Accounting Principles, or GAAP.
The appropriate framework depends on the organization, the intended users, and the requirements of the party requesting the statements. Possible frameworks may include:
- U.S. GAAP
- Cash-basis accounting
- Tax-basis accounting
- A contractual basis of accounting
- Another appropriate special-purpose framework
Management is responsible for selecting an acceptable financial reporting framework.
Some compiled financial statements may also omit substantially all disclosures ordinarily required by the selected framework. When disclosures or the statement of cash flows are omitted, the compilation report must explain the omission and warn that the financial statements may not be appropriate for users who are not informed about those matters.
Before requesting compiled statements, ask the lender, investor, regulator, board, or other recipient which reporting framework and disclosures it expects.
What Does a Compilation Report Include?
The CPA’s compilation report accompanies the financial statements and explains the nature of the engagement.
The report generally identifies:
- The organization whose statements were compiled
- The financial statements covered by the engagement
- The date or reporting period
- Management’s responsibility for the statements
- The professional standards used
- The fact that the statements were not audited or reviewed
- The fact that the CPA provides no assurance
- The CPA firm’s signature, location, and report date
The report may also address omitted disclosures, departures from the selected reporting framework, use of a special-purpose framework, or the CPA’s lack of independence.
Does a CPA Have to Be Independent for a Compilation?
Independence is not required to perform a compilation engagement.
However, the CPA must determine whether they are independent of the organization. If the CPA is not independent, that lack of independence must be disclosed in the compilation report.
This differs from a financial statement review or audit, where the CPA must be independent.
Organizations should understand this distinction when determining what level of financial reporting will satisfy a lender, grantor, investor, regulator, or other external party.
When Are Compiled Financial Statements Used?
A compilation may be appropriate when an organization needs professionally presented financial statements but no outside party requires assurance.
Common uses include:
Loan or Financing Applications
Some banks and lenders accept compiled financial statements for smaller loans, lines of credit, or annual covenant reporting.
Requirements vary considerably. A lender may accept a compilation in one situation but require reviewed or audited statements in another. Confirm the required level of service before engaging a CPA.
Internal Management and Planning
Compiled statements can help owners, executives, and finance teams review financial performance, compare reporting periods, and support budgeting or planning.
The statements provide organization and consistency, but management must remember that the CPA has not verified the underlying information.
Board Reporting
Boards may request formal financial statements to monitor an organization’s financial position and performance. This can be particularly useful for smaller businesses, associations, and nonprofit organizations that do not need an audit.
Nonprofit leaders can learn more about the reports typically presented to their boards in our guide to nonprofit financial statements.
Investors, Owners, and Business Partners
Private companies may use compiled statements to communicate financial information to owners, prospective investors, or business partners when those users do not require independent assurance.
Licensing or Contractual Requirements
Certain licensing bodies, contracts, bonding arrangements, or other third parties may accept or require compiled statements.
Never assume that a compilation will satisfy the requirement. Review the agreement or ask the requesting party whether it requires compiled, reviewed, or audited financial statements.
What Are the Benefits of Compiled Financial Statements?
When a compilation is appropriate, it can offer several practical benefits.
Professional Financial Presentation
A CPA helps present the organization’s information in a structured financial statement format under an appropriate reporting framework.
Lower Cost Than a Review or Audit
Because a compilation does not include assurance procedures, it generally requires less time and work than a review or audit.
Faster Process
A compilation can usually be completed more quickly when the organization’s records are accurate, reconciled, and properly organized.
Flexible Reporting
Compiled statements can be prepared under GAAP or an appropriate special-purpose framework, depending on the organization’s needs.
Useful Starting Point
A compilation can help an organization formalize its financial reporting as it grows. It may also reveal accounting records that need to be cleaned up before a future review or audit, even though identifying deficiencies is not the purpose of the engagement.
What Are the Limitations of Compiled Financial Statements?
The lower cost and shorter process come with important limitations.
Compiled financial statements do not:
- Provide assurance about accuracy or completeness
- Verify transactions or balances
- evaluate internal controls
- Include audit testing
- Provide an audit opinion
- Guarantee that fraud or errors will be detected
- Automatically satisfy lender, investor, or regulatory requirements
A compilation may not be sufficient when users need greater confidence in the organization’s financial reporting.
If a bank, grantor, regulator, investor, or board requires limited or reasonable assurance, the organization may need a review or financial statement audit instead.
