A compiled financial statement (FS) is a set of FS prepared by a certified public accountant (CPA) without giving any kind of assurance. Companies need to enter a compilation engagement with a CPA to have their FS compiled. Given that it’s a nonassurance engagement, the CPA will not issue any kind of opinion to the FS but is required to issue a compilation report.
Scope of a Compilation
In a compilation, a CPA only uses their expertise in financial accounting and reporting to prepare their client’s FS using the numbers directly from the client’s accounting system. The CPA does not do any work to verify the numbers. However, the reporting framework is not limited to the US GAAP. The client may request the CPA to use a special reporting framework for the purpose of the compilation (e.g., IFRS).
In a compilation service, the FS can be:
- Client-prepared, wherein the CPA will only review and examine the FS if it follows the agreed-upon financial reporting framework and is presented in proper format.
- Accountant-prepared, wherein the CPA will prepare and assemble the FS based on the data that the client provides.
Once the CPA has compiled the FS, they will issue a compilation report that must be attached to the FS upon completion of the engagement.
Here’s a sample compilation report:
[Accountant’s Firm Name]
[Accountant’s Firm Address]
[City, State, Zip Code]
[Date]
To Management of XYZ Company:
Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheet as of December 31, 20XX, and the related statements of income, changes in stockholders’ equity, and cash flows for the year that ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America.
We have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the financial statements, nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion or a conclusion nor provide any form of assurance on these financial statements.
Our responsibility is to compile the financial statements in accordance with SSARS and to disclose any departures from accounting principles generally accepted in the United States of America that come to our attention. Management is responsible for the fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.
[Accountant’s Firm Name]
[Signature of Accountant or Firm]
[Accountant’s City and State]
[Date]
Limitations of a Compilation
The greatest limitation of a compilation is it doesn’t provide any kind of assurance that the numbers included in the FS are accurate or complete. Hence, if compared to a reviewed or audited FS, decision-makers or users of the FS should not immediately rely on the information shown in a compiled FS.
Moreover, there are other limitations of compiled FS:
- For specific or limited use only: More often than not, companies purchase compilation services for a specific purpose only (e.g., profit planning, loan application requirement). Compiled FS should not be published or distributed to unintended users.
- Unable to detect fraud: A compilation cannot detect fraud because the CPA won’t review the client’s internal control system. Whatever data the client gave for compilation, the CPA has no responsibility to verify the accuracy and completeness of such data.
- Potential misstatements: Since the CPA relies on information provided by management, there is no way to identify errors or omissions.
Compiled Financial Statements’ Relevance for Small Businesses
Compared with a review or an audit, a compilation is more relevant to a small business. More often than not, small businesses will need compilation services to assemble a complete set of FS that comply with the US GAAP or any other reporting standard.
Making Internal Decisions
Compiled FS are prepared according to US GAAP guidelines, making the FS structured and organized. A well-prepared FS can be used for internal decision-making, such as analyzing performance and problem-solving. It can also help managers see a full picture of revenues and expenses, which could help them make strategic decisions in their responsible business areas.
Budgeting and Planning
You may engage a CPA providing compilation services to assist in making a prospective FS. A prospective FS contains financial forecasts and projections based on historical information. Compilation ensures that prospective FS follows US GAAP guidelines to enable business leaders to plan for the future and budget resources more effectively.
Using Special Purpose Frameworks
Compilation services can also use special purpose frameworks or non-GAAP frameworks. For instance, a small business may want to prepare FS using the cash basis of accounting or a modified cash basis.
If your business is conducting tax and profit planning, you can ask the CPA to prepare the FS using the tax basis of accounting, wherein rules in accounting follow the provisions and principles of tax laws, giving you a snapshot of your current and future tax obligations.
Compilation vs Review vs Audit of Financial Statements
Compilation | Review | Audits | |
|---|---|---|---|
Level of Assurance | None | Limited; FS has no material modifications | Reasonable; FS are fairly presented and free from material misstatements |
Scope of Procedures | Inquiry into the client’s financial reporting framework and use of financial accounting and expertise to prepare financial statements | Analytical procedures and inquiries only | Test of controls (inquiry, observation, inspection, reperformance) and substantive testing (analytical procedures, confirmation, inspection, recalculation, substantive analytics) |
Method of Choosing Data to Examine | No specific method; data must come from the business | Looking at plausible relationships in the FS and asking management | Audit sampling via statistical and non-statistical sampling techniques |
Extent of Work | Least extensive; focuses only on financial statement assembly | Moderately extensive; focuses only on material items and high-risk areas | More extensive; requires planning, sampling, and thorough examination of transactions and records |
Ability to Detect Fraud | Can’t detect fraud | Less likely than an audit | More likely than a review, but no assurance that fraud will be detected |
Conclusion | No opinion | CPA only expresses that they have found no material modification | CPA expresses an opinion (unqualified, qualified, adverse, disclaimer) |
Independence Requirement | None | Both fact and appearance | Both fact and appearance |
Person Performing | Must be a CPA knowledgeable of the client’s industry | Must be a CPA with accreditation to perform review services | Must be a CPA with accreditation to perform audits |
Frequently Asked Questions (FAQs)
Audited financial statements provide assurance through the auditor’s opinion, giving users confidence in the accuracy of the information. In contrast, compiled FS offers no assurance, as the CPA doesn’t perform any verification procedures during the compilation process.
Prepared financial statements don’t come with a report, whereas compiled financial statements must be done by a CPA and have a compilation report attached to them.
No independence requirement is needed for a compilation service. If the CPA performing the compilation is not independent, they must state in the compilation that they aren’t independent of the client.
Bottom Line
Compilation of financial statements is a service that only CPAs can provide. CPAs use their expertise in accounting to check whether the FS is prepared in accordance with US GAAP—or an alternative set of reporting guidelines—in the proper presentation of the FS. However, the CPA cannot give any kind of assurance to the FS because no procedures were performed to test the accuracy and completeness of the FS.
