We had a client recently ask if we could provide them with “Reviewed” financial statements. They were working on an investment round and were looking to apply as an “EBC” or Eligible Business Corporation. I am aware that means next to nothing to most people, but suffice it to say that it’s a pretty great government program that allows investors to invest money in certain small businesses and get some tax breaks in return. Win-win.
Well, as you can probably guess since the government is involved, it’s not all that simple. This particular program requires Reviewed financial statements. Yes, I capitalized that “R” on purpose because these are not statements that are just perused by someone and declared reviewed, they are, in fact “Reviewed”. Confused? You are not alone.
So, what do you need to know about “Reviewed” or any other types of financial statements?
We can break out financial statements prepared by accountants into three categories: Compiled (also known as Notice to Reader), Reviewed and Audited. If you will indulge me for just a moment, this stems from what it is that accountants actually do. Ever wonder why we are called “public” accountants? Didn’t think so, but I am going to tell you anyway!
We are called public accountants because we protect the public interest. If you take your financial statements to your bank to get a loan, they might ask you for the ones your accountant prepared (not the ones scribbled on the back of a serviette). They will ask for this because they want some assurance that the statements are correct and not made up. Accountants are thought to be pretty honest, if somewhat boring people (in an “I’m glad there are people out there like that” sort of way). Anyways, remember that word assurance. We are going to come back to it.
Ok, background done. Why does this matter to you? Well if you are running a business, it’s a good idea to know what kind of financial statements you need and when you need them (not when it’s too late). You’ll also probably need to know what the benefits and drawbacks are of each type. Read on.
Compiled (Compilation/Notice to Reader) Statements
In theory, these are statements prepared by your accountant based on the information you or your bookkeeper provide to them. They aren’t really supposed to do anything other than compile that information into a readable set of financial statements. I say in theory because that’s the thing about accountants, they just need them to be right. For that reason this is the most affordable, but probably the best bang for your buck. Most accountants will dig a little bit to make sure the statements aren’t wrong. They might not be perfect, but they’re looking pretty snazzy. Ok, maybe not this snazzy.
Joe circa 1985.
Pros:
- Most affordable
- Best bang for your buck because accountants like things just so
- Your accountant doesn’t have to be independent of the person who prepared your financials (i.e. you only need one accountant)
Cons:
- No assurance that your statements are right
- Could be less than you need if you have bank loans or other parties interested in your financials (such as grant-giving government organizations)
Reviewed Statements
Ok, we are going to go there. Assurance. We are adulting hard here, but bear with me. This is where accountants really start to shine. They can dig into other people’s work and find some mistakes and make the financials more right. At the end of this (mostly standardized) work, they will assure to the reader (bank, etc.) that nothing came to their attention to indicate there was something wrong. Read that again. Got it? It’s called negative assurance and it’s a thing that you have now heard of. You’re welcome.
Pros:
- You’ve entered the world of assurance; therefore, you’re a baller
- You can take your financial statements more places (like banks) and get bigger loans
- Your financial statements will be more right (i.e. more in accordance with Accounting Standards for Private Enterprise - ASPE), which means more comparable year over year
Cons:
- It’s going to cost you
- It’s an administrative burden because the reviewing accountants will require lots more information to be able to “assure” readers of the statements
Audited Statements
Most people we work with won’t get this far, but it’s an important piece to know when you are reciting this post at your next dinner party. Auditing takes assurance to the next level. By the next level I mean it takes the word “negative” out of the assurance so you can just call it assurance. Verbal brevity aside, it can be really helpful when you have grown large enough to hire your own management team and kick back in Zihuatanejo. You can have a team of accountants rock up once a year and make sure the financials are tip-top.
Pros:
- You are going to get some seriously right financial statements (statistically)
- If you are a hands-off owner, you will get some assurance for yourself
- It’s a requirement if you want to go public
Cons:
- It’s really expensive
- It’s a huge administrative burden that can tie up your own accounting team for a good chunk of the year
Conclusion
Compiled financial statements are all that most companies will ever need, but that doesn’t mean that you shouldn’t take in the above information. If you are looking to take on investment to grow at scale, there are many situations where you will need Reviewed or even Audited financial statements. Do not be taken off guard about the statements that you need. It can slow down an investment round and hinder your growth.
At Avalon, we only prepare compiled statements because we prepare or help you prepare the bookkeeping and therefore are not independent. We do, however, work with accountants that will review or audit your statements. If you want to hear more, reach out - we’re always happy to chat through your situation.
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