Whether used by company stakeholders, managers or even lending institutions, financial statements offer a deep insight into the finances and operations of a business. They basically show everyone how the business is doing.
But then, apart from financial statements, there are also situations when you might need compiled financial statements. Unless you work in the industry, it’s better to leave the job to an expert. But even so, it pays off understanding what compiled financial statements actually require.
So, what is a compiled financial statement? Let’s find out!
What Is a Compiled Financial Statement?
The compiled financial statements meaning refers to turning the bookkeeping information into financial statements. It’s usually what an external accountant does.
The compilation varies from one business to another, but in general, it refers to income statements, cash flow statements or balance sheets, among others.
Apart from the main requirements, an accountant can also offer different services to include in the compilation, depending on the management’s needs.
Only an accountant who understands your business can help with compiled financial statements. They also need to understand the industry. However, there’s no need to learn more about internal accounting or controls.
From a different point of view, it’s worth noting that accountants don’t necessarily need to provide an audit and ensure the statements are accurate. They’re only based on your current financial statements.
Compiled financial statements differ from audited ones because they don’t come with any assurance of accuracy or compliance.
However, if there are reasons to believe that data is incorrect, the accountant can obviously require more information.
What Is a Compiled Financial Statement Based on?
There are more steps in the process of obtaining a compiled financial statement. At first, if you need such a compilation, you’ll need to hire an external accountant. You’ll also have to provide financial data, such as entries, ledgers or journals.
If you use a particular program for bookkeeping, the accountant will usually require access to it.
Once all the data is collected, the accountant can start compiling the statements. Once again, this compilation is based on the information given by the business. It’s not an audit, so the accountant can’t provide assurance solutions. Controls aren’t checked either, but just the information provided.
Based on all these, if you provide wrong information, it will be reflected into the compilation. For example, errors like higher valuations of assets or understating expenses will be reflected into the compilation. This can create a serious impact if these statements are used for decision making.
But then, some accountants will also ask for more data, especially if they notice such errors. They can make adjustments, but only after a discussion with the management.
Like other similar accounting services, a compiled financial statement comes with an agreement. This means the accountant must outline all the procedures in the process, as well as their responsibilities. The management’s responsibilities will also be included in the agreement.
When the compilation is complete, you’ll get the financial statements, but you may also have to review misstatements with the accountant.
What Is a Compiled Financial Statement Useful for?
Like other types of financial statements, businesses often ask for a compiled financial statement when they need to offer financial information. It makes no difference who requests it.
If you require money for your business, a lending institution may ask you to offer a compiled financial statement, so someone can look into how your business is doing. The same rule applies if you’re about to get some new investors.
If someone wants to invest in your business or perhaps acquire it, they’ll need to know more about it, rather than what’s visible only. That’s when financial statements become useful.
When an external party gets a compiled financial statement, the respective person or institution is aware that an accountant has looked at your financial data and compiled it all. In other words, while such statements may contain errors, they’re compiled by external accountants.
Simply put, it’s not just a piece of paper written by the management. Instead, it’s a document based on financial records.
The compiled financial statement is a more popular requirement among small companies. They’re more likely to need external support, like money for growth. A big company can often sustain itself, but a small company may need support.
Although a compiled financial statement isn’t as detailed as an audit or other similar services, it’s still an important document that can give lenders or investors some extra confidence. However, this isn’t a general rule. Some external parties may go further and require audited statements.
Audited statements are more expensive and require more time, but they also provide more accurate details.
To help you understand how compiled financial statements work in terms of trust, imagine running a small business with $200,000 in annual revenue. Your profits are somewhere at $60,000. You need a loan in order to expand.
For this kind of money, the bank may require you to submit a compiled financial statement. This document helps them determine whether your business is financially stable enough to take on debt.
On the other hand, if you run a public company with millions in revenue, based on your location, you might be required by the law to undergo audits on a yearly basis. With all these, lenders may still ask for fresh audits, mainly because there’s more money at risk and the stake is higher.