What Is a Compilation in Accounting?
Understand compilation: a core accounting service for professionally presenting financial data, distinct from assurance-based engagements.
Understand compilation: a core accounting service for professionally presenting financial data, distinct from assurance-based engagements.
Businesses frequently require financial statements to assess their performance and financial standing. Accountants offer various services related to these statements, with compilation representing the most fundamental level of service for preparing financial information. This service helps businesses present their financial data in a structured format suitable for various stakeholders.
A compilation engagement involves an accountant presenting client-provided financial information, such as a balance sheet, income statement, and statement of cash flows, in a structured financial statement format. The accountant’s role is to ensure mathematical accuracy and adherence to an applicable financial reporting framework, like Generally Accepted Accounting Principles (GAAP) or a special purpose framework such as the tax basis of accounting.
The accountant does not verify the accuracy or completeness of the underlying data, meaning no assurance is provided regarding the fairness or accuracy of the financial statements. However, the accountant will inquire about information that appears incorrect or incomplete and may request supporting documentation if material misstatements are suspected.
When an accountant performs a compilation, they issue a formal report alongside the financial statements. This report clearly states that the accountant has not audited or reviewed the financial statements and disclaims any opinion or assurance on their accuracy or completeness.
The report identifies the entity, the specific financial statements compiled, and the period covered. It includes a statement that management is responsible for the financial statements and for providing accurate information. The report also states that the compilation was performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS) promulgated by the American Institute of Certified Public Accountants (AICPA).
Compilation, review, and audit services differ significantly in the level of assurance provided and the procedures performed. For a compilation, the accountant does not need to be independent, though any lack of independence must be disclosed in the report.
A review engagement provides limited assurance that the financial statements are free from material misstatement. This involves the accountant performing inquiry and analytical procedures, such as discussing accounting practices with management and analyzing financial data for unusual trends. Unlike a compilation, the accountant must be independent to perform a review.
An audit offers the highest level of assurance, known as reasonable assurance, that the financial statements are free from material misstatement, whether due to error or fraud. Auditors perform extensive verification and testing procedures, including examining source documents, assessing internal controls, and obtaining corroborating evidence. Compilations are the least expensive, followed by reviews, and then audits, which are the most costly.
Businesses opt for a compilation service when a high level of assurance on their financial statements is not required. It is a cost-effective option for small businesses or non-profits that need professionally prepared statements without the expense of a review or audit. Compilations are used for internal management purposes, allowing business owners to gain a clearer view of their financial standing and make informed decisions.
Compilations are also suitable for obtaining small loans where the lender does not require higher levels of assurance. They may fulfill basic regulatory requirements that do not mandate an audit or review. Startups or very small businesses find compilations useful when they need structured financial reports to demonstrate financial responsibility to potential investors or creditors, or for basic financial planning and tax filing.