In this article, Staff Accountant Jacob Coughlin, CPA shares a guide to attestation for business owners with a breakdown of options, levels of assurance and other key factors to help you make the right decision for your business.
A small business raising capital has two options, issue ownership to investors or take on debt from lenders. Either option may require management to present financial statements, prepared by a CPA (Certified Public Accountant), under U.S GAAP (Generally Accepted Accounting Principles). A CPA can provide three levels of financial statement engagements: Audits, Reviews, and Compilations. Each offers a different degree of confidence, or assurance, to the lender or investor relying on your numbers.
- Audits
An audit provides the highest level of assurance to the users of the financial statements. This level of assurance is known as “reasonable assurance” and results in an opinion on the fairness of the statements. Therefore, audits require the most work, time, and highest fees of the three engagements. It is common for auditors to work on site with their clients for access to records and communication. Management will have to devote time to working with the auditors throughout the engagement. This will result in a timely and efficient audit. Additionally, auditors must remain independent from their clients.
Assurance: Highest
Time/Cost: Most expensive and time-intensive
Independence: Required
2. Reviews
Reviewed financial statements provide a “Limited” level of assurance. Instead of giving an opinion, the CPA states they are not aware of any material issues that would make the statements non-compliant with GAAP. Reviews do not incorporate testing to the level of an audit. Instead, a Review focuses on making inquiries to their clients. Inquiries are based on findings through analytical procedures applied to financial records. Management should answer inquiries in an honest and timely manner. Like an audit, the business engaging the firm must make their financial records available to the reviewers. Reviews also require independence from their clients.
Assurance: Limited
Time/Cost: Moderate
Independence: Required
3. Compilations
Compiled financial statements do not provide any level of assurance or an opinion on the statements. Compilations produce financial statements by compiling management’s financial records as they exist and without testing. Adjusting or reclassifying journal entries may be suggested but are only made if management approves. Compilations do not require independence from clients. For example, the engaging firm may also provide outsourced accounting or consulting services to their client. Compilations require least amount of work and time, resulting in lower fees than audits and reviews.
Assurance: None
Time/Cost: Least expensive and fastest
Independence: Not required
Bottom line for business owners
Raising capital does not always require financial statements, but many lenders and investors expect them. The nature, complexity, and size of a business will determine which engagement is required. It is common for banks to include debt covenants that require annual financial statements for the life of the loan. It is up to business owners and management to weigh the cost of financial statements, against the benefits of raising capital. Across all three engagements, the CPA firm is not taking responsibility for the statements. The engaging firm is providing a level of assurance to the statements, which management will always remain responsible for.
We take great pride in our attestation services at BS&P and hold ourselves to the highest peer-reviewed standards of quality. Contact us to learn more about our financial statement audits or to consult on your unique situation.
