What Is Financial Statement Compilation?
Financial statement compilation is the lowest level of assurance services a public accountant can provide regarding an entity's financial statements. Within the realm of Accounting and Auditing Standards, a compilation involves presenting information provided by management in the form of financial statements without expressing any assurance on those statements. The accountant assists management in organizing their financial data into a formal presentation, typically including a balance sheet, income statement, and cash flow statement.
History and Origin
The framework for financial statement compilation, along with reviews and preparations, is governed by the Statements on Standards for Accounting and Review Services (SSARS) issued by the Accounting and Review Services Committee (ARSC) of the AICPA. The initial SSARS No. 1, "Compilation and Review of Financial Statements," was issued in December 1978. Over the years, these standards have evolved to provide clarity and address changes in accounting practices and technology. A significant update came with SSARS No. 21, issued in October 2014, which clarified and recodified the standards for reviews, compilations, and engagements to prepare financial statements. This revision aimed to improve the readability and application of the standards by mirroring the drafting conventions used in auditing standards, clearly distinguishing between different levels of service.6 SSARS No. 21 also refined the definition of a compilation, ensuring that it applies specifically when an accountant is engaged to perform a compilation service, moving away from a previous "submission" trigger that had caused confusion.5
Key Takeaways
- Financial statement compilation is the lowest level of service provided by an accountant, offering no assurance regarding the accuracy or completeness of the financial statements.
- The primary objective is to assist management in presenting their financial data in a structured and organized format according to an applicable financial reporting framework, such as GAAP.
- Compilations are typically more cost-effective and less time-consuming than reviews or audits, making them suitable for small businesses and internal management use.
- An accountant performing a financial statement compilation does not need to be independent of the client, but any lack of independence must be disclosed in the compilation report.
- The compilation report explicitly states that the accountant has not audited or reviewed the financial statements and, therefore, does not express an opinion or any other form of assurance on them.
Interpreting the Financial Statement Compilation
A financial statement compilation should be interpreted as a foundational presentation of a company's financial position and results, based solely on information provided by management. The accountant's role is not to verify the underlying data but to assemble it into the proper format, ensuring mathematical accuracy and adherence to the chosen financial reporting framework.
Users of compiled financial statements should understand that no independent verification or testing of the information has occurred. This means the compilation does not provide any assurance about the absence of material misstatements or whether the statements conform to Generally Accepted Accounting Principles (GAAP) or another chosen framework. While the accountant must assess whether the statements appear appropriate in form and free from obvious material errors, they do not perform procedures like evaluating internal controls or corroborating information with third parties.
Hypothetical Example
Consider "Bella's Blooms," a small, independently owned flower shop. Bella, the owner, keeps meticulous records of sales and expenses but lacks the expertise to formalize them into proper financial statements. She needs a presentable set of financial statements to apply for a small business loan to expand her shop.
Bella engages a public accountant for a financial statement compilation. She provides the accountant with her ledger, bank statements, sales receipts, and vendor invoices for the past year. The accountant takes this raw data and organizes it into a professional income statement, balance sheet, and cash flow statement, ensuring they follow the structural requirements of GAAP. The accountant might notice that certain expenses are unusually high and inquire with Bella about them, but they do not perform any substantive testing or verification. The final compiled financial statements are accompanied by a compilation report, clearly stating that no audit or review was performed and no assurance is provided regarding the accuracy or completeness of the information. Bella can then present these statements to the bank, which, for a smaller loan, may accept compiled statements as sufficient for their initial assessment.
Practical Applications
Financial statement compilation serves several practical purposes, particularly for entities that do not require the higher levels of assurance provided by a review engagement or a financial audit. They are frequently utilized by:
- Small Businesses and Startups: Many small businesses, family-owned companies, and startups use compiled financial statements for internal management purposes to monitor their financial performance and position. They are a cost-effective way to prepare formal financial reporting documents without the extensive procedures of an audit.
- Loan Applications: For smaller loans or lines of credit, particularly from local banks or credit unions, lenders may accept compiled financial statements as sufficient for evaluating a borrower's creditworthiness. While banks might prefer reviewed or audited statements for larger sums, compilations can be a starting point. Access to capital remains a significant challenge for small businesses, and providing structured financial statements, even if compiled, can be crucial for securing necessary financing.4
- Tax Preparation: While compilations do not provide assurance, the process of organizing data into formal statements can streamline tax preparation by ensuring that financial information is categorized consistently and accurately. The Internal Revenue Service (IRS) requires businesses to keep accurate records to clearly show income and expenses, and compiled statements can serve as part of this record-keeping.3
- Initial Investor Presentations: Some early-stage companies or non-profits may use compiled financial statements to provide basic financial transparency to potential investors, grantors, or board members when a full audit is not yet feasible or required.
- Managerial accounting and Decision-Making: Even without external assurance, compiled statements provide management with a structured overview of their financial activities, aiding in internal decision-making, budgeting, and performance analysis.
Limitations and Criticisms
Despite their utility, financial statement compilations come with significant limitations. The most critical aspect is the lack of assurance provided by the accountant. Unlike a review engagement, where limited assurance is given, or a financial audit, which provides reasonable assurance, a compilation explicitly states that the accountant has not verified the information.2 This means that while the financial statements are presented professionally, there is no professional opinion on their adherence to GAAP or freedom from material misstatement.
A primary criticism is that users might mistakenly infer a level of accuracy or reliability that is not present. Since the accountant relies solely on information provided by management without performing inquiry or analytical procedures, there is a higher risk that errors, omissions, or even fraud could go undetected. For example, if management provides inaccurate or incomplete data, the compiled statements will reflect those inaccuracies. This lack of verification makes compiled financial statements unsuitable for purposes where a high degree of confidence in the financial data is required, such as securing substantial financing, attracting sophisticated investors, or complying with regulatory requirements for public companies. For instance, the AICPA clearly distinguishes between the levels of assurance, noting that compilations are appropriate for lower financing amounts where a CPA "does not provide any assurance."1
Financial Statement Compilation vs. Financial Statement Review
The distinction between financial statement compilation and financial statement review lies primarily in the level of assurance provided by the accountant and the procedures performed.
| Feature | Financial Statement Compilation | Financial Statement Review |
|---|---|---|
| Level of Assurance | No assurance | Limited assurance |
| Accountant's Role | Assists management in presenting financial data in proper format; reads statements for obvious errors. | Performs inquiry and analytical procedures to obtain a reasonable basis for limited assurance. |
| Independence | Not required (but must be disclosed if lacking) | Required |
| Procedures | Primarily clerical and organizational; no verification or testing of underlying data. | Includes inquiries of management, analytical procedures, and other procedures as deemed necessary. |
| Report Content | Explicitly states no audit or review was performed, and no assurance is provided. | States that accountant is not aware of any material modifications needed for conformity with GAAP. |
| Cost & Time | Generally lower and less time-consuming | Higher than compilation, lower than audit |
| Typical Use | Internal use, small loans, basic external reporting | Medium-sized businesses, moderate financing, some regulatory compliance for non-public entities |
While a compilation merely presents management's data, a review involves the accountant performing specific procedures—chiefly inquiries of company personnel and analytical procedures applied to the financial data—to provide a limited level of assurance. This means that for a review, the accountant can state whether they are aware of any material modifications that should be made to the financial statements for them to conform to the applicable financial reporting framework. This limited assurance offers users a higher degree of comfort than a compilation, making reviewed statements suitable for situations requiring a slightly greater level of credibility.
FAQs
What kind of businesses typically get financial statement compilations?
Small businesses, startups, and non-profit organizations often opt for financial statement compilations. They are a cost-effective way to present formal financial statements when a full audit or review is not required by lenders, investors, or regulators.
Does a financial statement compilation involve an audit?
No, a financial statement compilation does not involve an audit. An accountant performing a compilation does not verify the information provided by management and does not express an opinion on the accuracy or completeness of the financial statements. A financial audit is a much more extensive process that provides a high level of assurance.
Can a compilation be used for securing a loan?
Yes, a compilation can be used for securing a loan, especially for smaller loan amounts. Many local banks or credit unions may accept compiled financial statements. However, for larger loans or from more stringent lenders, a review engagement or an audit might be required to provide greater assurance.
What is the accountant's responsibility in a compilation?
In a financial statement compilation, the accountant's primary responsibility is to assist management in presenting their financial data in a structured format in accordance with an applicable financial reporting framework. They must read the statements and consider whether they appear appropriate in form and free from obvious material errors. The accountant does not perform any procedures to verify the accuracy or completeness of the information.
Are disclosures required in compiled financial statements?
For general purpose compiled financial statements, certain disclosures may be required by the applicable financial reporting framework (e.g., GAAP). However, management may elect to omit substantially all disclosures in compiled financial statements, provided the compilation report clearly states this omission, and the statements are not intended to mislead users.