Accounting 101

Compiled financial statements are based on information provided by the entity’s management.

Finance and accountingThey are useful when limited in-house capabilities for preparing financial statements exist or to small, privately held companies that need help in preparing their financial statements.

Through compilation services, a CPA prepares monthly, quarterly, or annual financial statements. However no assurance is offered as to whether material or significant changes are necessary for the statements to be in conformity with generally accepted accounting principles (the set of rules regarding financial accounting and reporting). During a compilation, the data is simply arranged into a conventional financial statement form. No probing is conducted beneath the surface unless the CPA becomes aware that the data provided is in error or is incomplete.

However, before agreeing to perform a compilation, a CPA will take a “common sense” look at the organization’s accounting system to decide whether other accounting services may be needed, such as help in adjusting the accounting records. The CPA will also become familiar with the accounting principles and practices common to the client’s industry, and will acquire a general understanding of the client’s transactions and how they are recorded.

After compiling the financial statements, the CPA is obliged to read them and consider whether they are appropriate in form and free from obvious material errors. A report is then issued, stating that, in effect, the financial statements were compiled, but because they were not audited or reviewed, no opinion is expressed.

Compilation standards permit an accountant to compile financial statements that omit the footnote disclosures required by generally accepted accounting principles. This is allowable as long as the omission is clearly indicated in the report and there is no intent to mislead users. However, when footnote disclosures have been left out, a third paragraph is added to the compilation report stating that management has elected to omit disclosures normally required by 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.

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.