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Preparations vs. compilations

Your business needs financial statements so management can monitor performance, attract investment capital and borrow money from a bank or other lender. But not all financial statements are created equal. Audited statements are considered the “gold standard” in financial reporting. While public companies are required to issue audited statements, smaller, privately held organizations have options. CPAs provide three other types of financial statements, which, in order of descending level of diligence, are: reviews, compilations and preparations.


Here’s some insight into the newest and most basic financial reporting service available to private businesses — preparations — and how these engagements differ from compilations.


Preparations


Financial statement preparations are often created as part of bookkeeping or tax-related work. While some lenders may accept preparations in support of small lending arrangements, preparations are generally reserved for internal purposes to provide information on the business’s current financial condition and as a basis of comparison against future accounting periods.


Preparations provide no assurance regarding the accuracy and completeness of the financial statements. Assurance is critical if you plan to share the financial statements with third parties. Generally speaking, the greater the level of assurance, the more trust a reader will have in the accuracy and integrity of your company’s financial statements.


In addition, professional standards don’t require CPAs to be independent of a business when preparing its financial statements. In other words, it’s OK for an accountant to have a financial interest in a company that he or she prepares financial statements for.


To avoid misleading any third parties who might receive a copy of these statements, each page of a prepared financial statement must include a disclaimer or legend stating that no CPA provides any assurance on the financial statements. In addition, prepared financial statements must adequately refer to or describe the applicable financial reporting framework that’s used and disclose any known departures from that framework.