The accounting profession recognizes that different entities have different accounting needs. Acknowledging these differences, the profession has developed standards that enable us to offer a range of financial statement services to private companies.

We may provide a client with three distinct services involving financial statements. Each is designed to meet a different need.

A compilation is useful to small, privately held companies that need help in preparing their financial statements.

A review on the other hand, may be adequate for entities that must report their financial positions to third parties, such as creditors or regulatory agencies. Reviewed financial statements may also be useful to business owners who are not actively involved in managing their companies.

An audit is the third and most extensive service. An audit is appropriate for businesses that must offer a higher level of assurance to outside parties. An unqualified opinion from a CPA after an audit provides reasonable assurance to outside parties that the entity’s financial statements present fairly its financial position, results of operations and cash flows in accordance with certain accounting principles generally accepted in the United States of America called GAAP (generally accepted accounting principles).

Compilation, review and audit services for private companies are explained in greater detail below.

A compilation is the preparation of an entity’s financial statements based on information provided by the entity’s management.

Through compilation services, we prepare monthly, quarterly or annual financial statements. However, we offer no assurance as to whether material, or significant, changes are necessary for the statements to be in conformity with U.S. GAAP. During a compilation, the data is simply arranged into conventional financial statement formats. We do not probe beneath the surface unless we become aware that the data provided is in error or is incomplete.

Before agreeing to perform a compilation, we will take a "common sense" look at the organization’s accounting system to decide whether you need or want other accounting services, such as help in adjusting the accounting records.

Here is what a compilation entails:

We become familiar with the accounting principles and practices common to your industry, and we acquire a general understanding of your transactions and how they are recorded.

After compiling the financial statements, we are obliged to read them and consider whether they are appropriate in form and free from obvious material errors. We then issue a standard report that says, in effect, that the financial statements were compiled, but because they were not audited or reviewed, we express no opinion.

Compilation standards permit an accountant to compile financial statements that omit footnote disclosures required by U.S. GAAP. This is allowable as long as the omission is clearly indicated in the accountant’s report and there is no intent to mislead users. However, when footnote disclosures have been left out, we add a third paragraph to the compilation report stating that management has elected to omit disclosures normally required by U.S. generally accepted accounting principles. This paragraph lets the user know that if the financial statements contained this information, it might affect the user’s conclusions.

As an alternative to “standard” compilation financial statements, we may also issue what are called “Management Use Only” compiled financial statements (not intended for third party use), wherein there might be undisclosed, material departures from U.S. GAAP and wherein substantially all disclosures required by U.S. GAAP would be omitted. In this case, management would represent that it has knowledge of the nature of the procedures applied and the basis of accounting and assumptions used in the preparation of the financial statements that allows management to place the financial information contained in the statements in the proper context. Further, management would also make several other representations: 1) that the financial statements are intended solely for its information and use and are not intended to be, and should not be, used by third parties; 2) that it will not distribute the statements to third parties; 3) that the use of the financial statements would be limited to members of management with similar knowledge; and 4) that it is management’s responsibility to educate other members of management with whom it chooses to share the financial statements to enable them to understand the potential limitations of such statements and to place the information in its proper context.

A compilation is sufficient for many private companies. However, if a business needs to provide some degree of assurance to outside groups that its financial statements are reliable, it may be necessary to engage a CPA to perform a review.

A review includes inquiry and analytical procedures applied to financial statements.

A private company may engage us to perform a review of its financial statements and issue a report that provides limited assurance that material changes to the financial statements are not necessary. With respect to reliability and assurance, a review falls between a compilation, which provides no assurance, and the more extensive assurance of an audit.

Before a review, we may have to compile the financial statements. However, in all cases, the financial statements are management’s statements, not ours. Management must have a sufficient understanding of the financial statements to assume responsibility for them.

Two other factors differentiate a review from a compilation—we must remain independent of the client during a review, and all appropriate disclosures must be included in the reviewed statements.

Here is what a review entails:

We obtain a working knowledge of the industry in which the entity operates and we acquire information on key aspects of the organization, including operating methods, products and services, and material transactions with related parties.

We will then make inquiries concerning such financial statement related matters as accounting principles and practices, recordkeeping practices, accounting policies, actions of the board of directors, and changes in business activities. Then we will apply analytical procedures designed to identify unusual items or trends in the financial statements that may need explanations. Essentially, a review is designed to see whether the financial statements "make sense" without applying audit-type tests.

Keep in mind that during a review, we do not confirm balances with banks or creditors, observe inventory counting, or test selected transactions by examining supporting documents. However, in many instances, a review—with its limited assurance—may be adequate for a business or its creditors. If more assurance is necessary, the organization may need to engage us to perform an audit.