When an external accountant puts together financial statements for a company using information that the business has provided them with, this is known as a ‘compilation engagement.’ The accountant doesn’t, however, verify or validate any of the information they have been provided with, such as would normally take place during assurance activities.
The purpose of a compilation engagementis to help those managing a business present their financial information in the form of statements. Despite a CPA not providing any assurance, compilation financial statements can still be immensely helpful when managers need to fulfil third party reporting requirements (for those not needing statements that have been audited or reviewed), or simply for internal use.
What are the benefits of a compilation engagement?
In Canada, the task of financial reporting is made far easier with the practical solution of a compilation engagement, with no need for the processes of extensive verification required for audits or reviews.
Below are the main benefits of a compilation engagement:
- Offers a cost-effective solution to financial reporting
Fully fledged services for financial assurance can be costly, whereas compilation engagements offer cash-strapped businesses an alternative that’s kinder to their budget. This is because the CPA is notrequired to verify whether the information they have been provided with, is accurate and complete.
- Is suitable for small businesses
Compilation engagements are often of particular use to smaller businesses, especially those whoare not required to take part in reviews or audits, as is often the case.
- Can help satisfy lending institutions
It can sometimes be the case that a financial institution requires a financial statement to be produced when assessing a business’s loan application, or for the purposes of monitoring. Should a lender be able to review a compilation of financial statements, they can check whether the business in question is able to meet the terms and fiscal responsibilities of a financial agreement.
Do you need a compilation engagement?
If your Canadian business is required to produce structured financial statements for any reason – which may be internal purposes or to help satisfy the requests of a third-party without review-level assurance or an audit – then a compilation engagement would be necessary. And, although it isn’t mandatory, having a professional such as a CPA prepare this for you is the best option,as they adhere to a much stricter set of standards for reporting than non-CPAs.
Below are some common situations in which smaller businesses might seek a CPAs help in preparing a compilation engagement:
- For the purpose of internal planning
When budgeting and planning for the future of their company, many small-to-medium sized businesses will use compilation engagements to guide them.
- When applying for credit
It’s often the case that a lending institution will request financial statements from a business to help them assess their application for credit, and oftentimes, a compilation may suffice.
- For compliance purposes
Financially compiled statements may be required in some jurisdictions or within certain industries, for statutory compliance purposes, even without the requirement for an audit.
When determining whether to seek help from a registered CPA for financial statement compilation, businesses may want to carefully consider the cost, ownership structure of the company, and intended use of the statements. For many businesses, it offers an effective and budget-friendly way to make a formal presentation of their financial information, without having to go through the added cost and stress of an audit or a review.