When they think about working with an accountant, most small business owners think about taxes. But accountants provide a host of more comprehensive and helpful services than just tax preparation.
One of the most helpful of these services is financial statement preparation and analysis. Accountants offer three levels of service in the preparation and analysis of financial statements and assume a different level of responsibility with each. The level of service provided is detailed in an accountant’s report that accompanies financial statements delivered to clients.
The most basic level of service is a compilation. As the name suggests, an accountant will compile information supplied by the business and present it in financial statement format. The data reflects management’s representations of the business’s financial condition, with the accountant offering no explanation or analysis of the data or any degree of assurance as to its accuracy.
Procedures required by the accountant for a compilation are limited but include familiarity with the accounting practices of each client’s particular industry, a general understanding of the client’s business transactions and the form of its accounting records, and determining whether the form and content of the financial statements are appropriate and if there are any obvious material errors.
Compilations are most appropriate for small and micro-businesses and self-employed individuals who have relatively unsophisticated financials that do not require the independent analysis a certified public accountant can provide. Ideally these owners should have a relatively high degree of financial expertise, including the ability to analyze their financial statements themselves and recognize important trends and warning signs of potential problems.
The next level of accounting service is a review. Here the accountant will ask the client about certain aspects of the financial statements and test management assumptions by applying analytical procedures as well as identify any potentially questionable items or trends in the financial statements.
With a review the accountant provides a limited degree of assurance as to the accuracy and reliability of the financial statements; specifically that no material changes are necessary for the statements to comply with generally accepted accounting principles, or GAAP. If it is determined that the statements do not conform to GAAP, this will be disclosed in the accountant’s report.
The most comprehensive level of service an accountant can provide with regard to financial statements is an audit. This provides the highest level of assurance from an accountant that the information contained in a client’s financial statements is both accurate and reliable. The accountant will express his or her opinion as to the accuracy and reliability of the financial statements, specifically whether they are free of material misstatements and presented fairly in accordance with GAAP.
The accountant/auditor will test the financial transactions and internal control systems upon which the financial statements are based, following standards administered by the American Institute of Certified Public Accountants. He or she will also confirm the client’s stated assets and liabilities with outside parties, review and evaluate internal controls, and inspect all transactions and their supporting documentation. It’s important to note that while the accountant will express an opinion as to the accuracy of the financial statements, the statements themselves are the representation of management, not the accountant.
There are a number of different reasons a company might want to hire an accountant to perform an audit, including to satisfy requirements in loan documents or help a potential lender evaluate credit, to satisfy regulatory agency requirements, or to provide detailed financial information to owners, executives, and shareholders.
Don Sadler is a freelance writer and editor specializing in business and finance.