Alternatives to Audits and Reviews
If you can’t afford an audit or review, what is the least expensive accounting financial service that your banker or investor may accept ?
Preparation and Compiled financial statements provide insight to your business operations for owners, shareholders, lenders and investors and may be a viable alternative for lenders and investors, who are entitled to receive monthly or quarterly reviews or annual audits.
First of all, before you consider this alternative, it is important to make sure that the intended users, the lenders and investors, will accept either of these alternative financial statements. This alternative is not intended for public companies or as may be required by other governmental agencies. As far as shareholders, lenders and investors, review your loan or capitalization documents to determine if a preparation or compilation is acceptable. There is a service called Agreed Upon Procedure, which is more akin to an audit than to a compilation or review and is not considered a significant cost effective audit alternative, however, it is generally less in scope and less costly than audit and could be considered if preparation and compiled financial statements are not an acceptable alternative.
What you can you do ?
Even if you have the financial statement requirement for an audit or review, its a good idea to reach out to the shareholders, lenders and investors to ask them for a waiver to ask if they will accept a compilation or preparation. This makes sense because some third parties are aware of the business strains resulting from the Pandemic and may want to assist.
In many cases, the lenders or investors that request financial information from your company, use terms that are generic or otherwise inconsistent with the actual wording used by CPA’s in the accounting profession. For example, banks often request a “CPA prepared financial statement” or something that is similar. If these generic terms are used, its a good idea to seek clarification.
A financial statement preparation or compilation are the two least expensive financial accounting services as compared to an audit or review. Therefore, they are preferred by those companies who cannot afford an audit or review. However, because there is no assurance afforded to compiled or prepared financial statements, a compilation or a preparation may not be preferred by lenders or investors. Don’t forget, it always a good idea to ask your lender if they will accept a compiled or prepared financial statement. With QuickBooks, that has been set up for external use and is formatted to prevailing financial formats these types of financial statements may be easy to produce. Further, QuickBooks Online provides pre-formatted professionally looking financial statements, called Management Reports, which can be customized, including accounts receivable aging and accounts payable aging reports. A preparation or compilation will simplify your financial reporting requirements, and reduce the related expenses for the cost of an audit or review.
Pro-Active Advice
A CPA, who specializes with financial statements, rather than tax, generally understands the terminology and practical application and pros and cons of the audit, review, compilation and preparation of your financial statements. First ask your CPA to explain this topic to you and second to work with your lender or shareholder to assist in renegotiating the best solution for your financial reporting needs while meeting the compliance needs of your banker or lender. One last suggestion, this same approach should be considered when any new loan or investment is being considered.