Your business needs financial statements. That way, management can monitor performance, attract investment capital, and borrow money from a bank or other lender. But not all financial statements are created equal. Audited statements are considered the “gold standard” in financial reporting. While public companies must issue audited statements, smaller, privately-held organizations have options. CPAs provide three other types of financial statements. In order of descending level of diligence, they are reviews, compilations, and preparations.

Here’s some insight into the newest and most basic financial reporting service available to private businesses — preparations — and how these engagements differ from compilations.

What are preparations?

CPAs often create financial statement preparations as part of bookkeeping or tax-related work. Some lenders may accept preparations in support of small lending arrangements. However, preparations are generally reserved forinternalpurposes. They provide information on the business’s current financial condition. Also, as a basis of comparison against future accounting periods.

Preparations do not assure the accuracy and completeness of the financial statements. However, assurance is critical if you plan to share the financial statements with third parties. Generally speaking, the greater the level of assurance, the more trust a reader will have in the accuracy and integrity of your company’s financial statements.

In addition, professional standards don’t require CPAs to be independent of a business when preparing its financial statements. In other words, it’s okay for an accountant to have a financial interest in a company that they prepare financial statements for.

Each page of a prepared financial statement must include a disclaimer or legend stating that no CPA provides any assurance on the financial statements. The purpose is to avoid misleading third parties who might receive a copy of these statements. In addition, prepared financial statements must adequately refer to or describe the applicable financial reporting framework used. They must also disclose any known departures from that framework.

What are compilations?

Like preparations, compilations do not assure that the financial statements are accurate and complete. When issuing compiled financial statements, independence isn’t required. But there are subtle differences when moving from a preparation to a compilation.

A compilation involves issuing aformalreport by a CPA who’s required to read the statements and evaluate whether they’re free from obvious material errors. The CPA’s report appears on the first page, before the financial statements. If the CPA isn’t independent of the business, they must disclose this fact in the report.

Notably, the use of a compilation of financial statements can extend beyond the business owner to third parties. This includes investors, business partners, and lenders who may view the input of a CPA as beneficial.

What’s right for you? Preparations or complilations?

Preparations may be a cost-effective way for small business owners to monitor performance. But they provide limited usefulness as a business grows and needs to interact with third parties. Eventually, prepared statements should get an upgrade to a compilation, review, or audit. That is, to give stakeholders greater assurance about the company’s financial results. Contact our RRBB accountants and advisors to determine what’s suitable for your current situation.

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DISCLAIMER: “RRBB” is the brand name under which Rosenberg Rich Baker Berman P.A. and RRBB Advisors, LLC and its subsidiary entities, including CFO Financial Partners LLC, provide professional services. Rosenberg Rich Baker Berman P.A. and RRBB Advisors, LLC (and its subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Rosenberg Rich Baker Berman P.A. is a licensed independent CPA firm that provides attest services to its clients, and RRBB Advisors, LLC and its subsidiary entities provide tax and business consulting services to their clients. RRBB Advisors, LLC and its subsidiary entities are not licensed CPA firms.