Definition
A Compilation Report is a document prepared by a certified public accountant (CPA) for a client, which presents financial data, such as financial statements, provided by management. It does not offer any assurance on the validity or accuracy of the data and differs from a review or an audit, where the CPA verifies the data. Essentially, it combines various financial documents into one consolidated report without providing any analysis or verification.
Key Takeaways
- A Compilation Report is a financial document prepared by a certified public accountant (CPA). It involves compiling data from a company’s financial statements, without providing assurance as to its accuracy.
- As the CPA does not conduct a detailed examination of the company’s financial statements during a compilation, he/she does not express an opinion or provide any assurance about the fairness of the financial statements.
- Compilation Reports are typically used by small businesses that do not require separate review or audit services, providing a more affordable way to sort and present financial data for internal use, creditors or income tax reporting.
Importance
A Compilation Report is an important financial document as it assures that a company’s financial statements are presented correctly, without any substantial misrepresentations.
It’s prepared by a certified public accountant (CPA), who compiles the data from the company’s records, without carrying out an audit or review.
This report has value to small business owners, lenders, investors or other stakeholders as they rely on it to provide a clear picture of a company’s financial position.
Though it doesn’t guarantee absolute accuracy, a Compilation Report can provide some level of confidence in the company’s financial statements and aid in decision-making processes.
Explanation
The purpose of a Compilation Report is to assemble the financial information provided by an entity’s management, and present this data into the format of financial statements without providing any assurance or audit opinion on them. It’s extensively used by smaller, less complex organizations that do not require a higher level of assurance provided by reviews or audits.
The compilation process allows businesses to collate financial records in a coherent and properly structured manner, making the data examination process more efficient for internal use or for third parties like potential lenders or investors. The Compilation Report presents a true and clear view of a company’s financial position without verifying the accuracy of the information used in its compilation.
This makes it somewhat different from audit reports that involve an intensive examination of financial data and confirm its accuracy. The Compilation Report aids businesses in illustrating their worth more tangibly, making it easier for stakeholders to understand the organization’s financial status.
However, it’s important to consider that since an independent accounting firm doesn’t verify or give an opinion on the depicted data, parties utilizing this report should do so with an understanding of these limitations.
Examples of Compilation Report
A Compilation Report is a financial statement prepared by a company’s outside accountant. Here are three real-world examples:
Small Business Compilation Report: Suppose there is a small business owner operating a bakery downtown. They do their basic bookkeeping, but they aren’t certified accountants and they need their financial statements to be organized and compiled in a proper way. They can hire an external accountant who will go through their financial information systematically, without providing any assurance or judgment on the data, and compile their financial statements. This is a Compilation Report and it’s helpful for the business owner to understand their financial position better.
Non-Profit Organization Compilation Report: A non-profit organization is required to present their financial statements to their board members, donors and to the public every year. They might use an external accounting firm to compile their financial information into acceptable financial statements. A Compilation Report provides no assurance the financial statements are free of material misstatements, but it does allow the organization to present their financial information in a format that would be widely understood and accepted.
Startup Business Compilation Report: Suppose there’s a startup that wants to procure funding from a VC. While the startup may have its own accounting data, the VC might prefer a Compilation Report prepared by a third-party accountant as it is a more neutral and standard report. The VC firm understands the report provides no assurance, but it helps them to get a clearer picture of the company’s finances. As such, they request this report as part of the due diligence process.
Frequently Asked Questions about Compilation Report
What is a Compilation Report?
A Compilation Report is a financial statement that an accountant has prepared based on the information provided by a company’s management. It’s important to note that a Compilation Report does not offer any assurance about the accuracy of the financial statements.
When is a Compilation Report typically used?
A Compilation Report is generally used for internal purposes by a company’s management to understand the financial health of the company. It may also be used by certain lenders who require financial statements but do not require them to be audited or reviewed.
What’s the difference between a Compilation Report, a review and an audit?
The primary differences lie in the level of assurance provided by the accountant and the extent of analysis, inquiry and procedure performed. A Compilation Report provides no assurance, a review provides limited assurance, and an audit provides the highest level of assurance that the financial statements are free from material misstatement.
Who can prepare a Compilation Report?
A Compilation Report can be prepared by an accountant who is independent, an independence compromised accountant, or an accountant who is not independent of the entity.
How is a Compilation Report structured?
A Compilation Report typically includes the accountant’s report, balance sheet, income statement, and notes to the financial statement. The accountant’s report briefly describes the nature of the procedures performed and the level of service provided.
Related Entrepreneurship Terms
- Financial Statements
- Auditor’s Report
- Accounting Standards
- Unaudited Financials
- Professional Ethics
Sources for More Information
- Investopedia: This website provides a wide range of financial information, including a detailed definition and explanation of Compilation Report.
- American Institute of Certified Public Accountants (AICPA): AICPA sets ethical standards for the profession and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments.
- Accounting Tools: Accounting Tools provides comprehensive resources pertaining to all accounting matters, including Compilation Report.
- Corporate Finance Institute (CFI): CFI provides financial modeling training and global certifications. They also offer a wealth of free resources about various finance terms, including Compilation Report.
