For most small business owners, their attorney, banker, and accountant represent their three most important professional relationships. An owner’s partnerships with these advisors are crucial to the ongoing success of any small business enterprise. This makes it critical that they communicate openly.
One common area of misunderstanding has to do with the owner’s expectation of service levels provided by their advisors. This is especially common in the realm of accounting services. Accountants can provide an extremely wide range of value-added financial services to their small business clients, but owners need to be clear in describing which specific services they expect to receive from their accounting firm.
Accountants can provide four primary levels of service:
- Tax return preparation: This is the most basic level of service an accountant can provide. It usually includes help in estimating quarterly tax payments in addition to preparing and filing annual business tax returns. This level of service is often adequate for self-employed individuals and micro businesses; however, it’s a good idea to at least talk to your accountant about the potential benefits that might come with receiving more detailed and comprehensive financial and accounting services.
- Compilation: This level of service is more involved than simple tax-return preparation. With a compilation, the accountant takes financial information supplied by the business and puts it into financial statement format. However, no analysis or explanation of the data is provided, nor is any assurance of the data’s accuracy. The accountant is simply plugging client-supplied information into the right format so it can be properly viewed by financial professionals, including lenders and investors.
- Review: With a review, the accountant provides a limited degree of assurance that the financial statements he or she compiles from the client-supplied data comply with generally accepted accounting principles, or GAAP, without having to make any material changes. The accountant will make specific inquiries about the financial statements, as well as apply certain analytical procedures to test assumptions made by management and uncover any items that appear out of the ordinary.
- Audit: An audit is the most detailed and comprehensive level of accounting services available. Unlike with a review, the accountant will express his or her opinion about whether the financial statements are free of material misstatements and presented in accordance with GAAP. Doing so involves testing underlying financial assumptions and transactions as well as confirming the existence and amounts of assets and liabilities with objective outside parties. The accountant will also carefully evaluate the business’s internal control systems and inspect financial transactions and supporting business documentation. Full-blown audits can be expensive and are usually reserved for middle-market firms and large corporations, though in some circumstances smaller businesses can benefit from an audit.
Don’t assume you are receiving a certain level of services. Instead, be proactive and talk openly with your accountant about the services he or she can provide. Doing so will help ensure that you receive the level of service that is most appropriate and beneficial for your company and that you are not paying for comprehensive and expensive services that you don’t need.
Don Sadler is a freelance writer and editor specializing in business and finance.