NEWS & RESOURCES

Authored by: Polina Akimov, CPA

Choosing the Right Financial Reporting Option for Your Business

Financial reporting is a crucial element of any business, shaping its credibility, investor confidence, and compliance with regulatory demands. Whether you’re a startup, a growing enterprise, or a company preparing for a sale, selecting the appropriate level of financial scrutiny—compilation, review, or audit—can have significant implications.

Each option offers different levels of assurance and serves distinct business needs. Let’s explore their differences to determine the best fit for your situation.

Compilation: Organizing Financial Data with No Assurance

A compilation is the most basic form of financial reporting. In this process, an accountant takes financial data provided by management and arranges it into financial statements without verifying their accuracy or compliance with Generally Accepted Accounting Principles (GAAP).

Depth: The compilation offers no assurance—meaning the accountant does not express any opinion on the reliability of the statements.

Cost: This option is the least expensive of the three since it requires minimal time and analysis.

Use Cases: A compilation is suitable for businesses that require financial statements but do not have external stakeholders demanding verification. It is often used for:

• Internal financial tracking
• Early-stage startups
• Sole proprietors and small LLCs
• Businesses with minimal external scrutiny
• Small-scale financing

Review: Limited Assurance with a CPA’s Expertise

A review provides a level of credibility beyond a compilation without the depth of an audit. A Certified Public Accountant (CPA) performs limited procedures—such as inquiries with management and analytical analysis—to assess the plausibility of financial statements.

Depth: A review offers limited assurance, meaning the CPA confirms they are unaware of any material modifications needed but does not perform extensive verification.

Cost: More thorough than a compilation but less rigorous than an audit, a review has a mid-range cost that depends on the complexity of financial data.

Use Cases: Businesses often choose a review when seeking financial support, especially when lenders or investors require financial statements but do not demand full audits. Typical scenarios include:

• Growing businesses
• Companies seeking bank loans
• Enterprises looking for investors
• Situations where minority stakeholders require some verification

Audit: Highest Level of Assurance for Regulatory and Investor Confidence

An audit is the most comprehensive financial analysis, involving a CPA’s detailed examination of financial records, internal controls, and processes to ensure compliance and accuracy. This extensive scrutiny is critical for businesses that need to maintain transparency with investors, lenders, or regulatory bodies.

Depth: An audit provides high assurance, confirming that financial statements are free from material misstatement.

Cost: Due to the depth and work involved, an audit is the most expensive financial reporting option.

Use Cases: Audits are typically mandatory for publicly traded companies and highly recommended for private businesses with external investors or regulatory scrutiny. They are necessary for:

• Public companies (legal requirement)
• Private businesses with significant external investors
• Businesses preparing for an IPO or sale
• Companies meeting regulatory or lender obligations

Making the Right Choice

Your business’s financial reporting needs depend on its size, stakeholders, and regulatory requirements. Here’s a simplified guide:

Selecting the correct financial reporting process ensures efficiency, credibility, and cost-effectiveness while meeting the necessary assurance levels for your stakeholders. Understanding these differences helps business owners make informed decisions that align with their financial and regulatory responsibilities. If you have questions about how to select the correct financial reporting process, contact us at cnccpa.com or call (509) 663-1661. We’re here to provide you with a complete financial team in your corner.