What Are Compilations? Understand this Accounting Principle

Accounting services can be broken down into three main categories: compilation, review, and audit engagements. Understanding the differences between these services can help you determine which is the most suitable for your business’s stakeholders.

In this article, we’ll cover everything you need to know about compilations, including what they are, why you need them, and when you should get one.

What are compilations?

A compilation is a summary of important information in a business’s financial statements created from information provided by the business. During a compilation engagement, an accounting service provider doesn’t conduct any internal audit procedures, so they can’t offer any analytical procedures or provide assurance services.

Typically, compilations are used for presenting information to your internal stakeholders. From time to time, though, they may also be presented to external stakeholders such as lenders. If you’re presenting your compilations externally, you, as the business owner, take responsibility for the information presented in the compilation report and accounting records.

Complilation reviews involve an accountant looking through your information and providing a limited assurance that the numbers in your financial statement are in the right places and make sense. In comparison, an audit—which is the most rigorous level of service—requires the accountant to assess any fraud risks and obtain evidence to support the numbers found in your business’s financial statements. An audit is the highest level of assurance a certified public accountant (CPA) can provide.

Who has responsibilities for compilations?

Preparing a compilation is a combined effort between your business and your accountant. You or your team will provide the CPA with a detailed record of all the work that has been done, along with source documents to support transaction information.

The accountant should have a fairly good understanding of your industry. In general. CPAs doing compilations are responsible for providing three things:

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What are examples of a compilation?

Here are two examples of what an accountant’s compilation report might look like for company XYZ:

• “I have compiled the financial statements of XYZ firm. These financial statements include the balance sheet, cash flow statement, and income statement for the year ended Dec. 31, 2020. I have followed the Generally Accepted Accounting Principles as issued by the Financial Accounting Standards Board. The management team of XYZ firm takes complete responsibility for the information presented in the compilation. I have neither expressed an opinion nor do I provide assurance on the accuracy of the information presented in these financial statements.”
  

• “I have completed the compilation of the aforementioned financial statements. I did not review or assess the accuracy of the financial statements and, as such, the management team of XYZ takes full responsibility for the accuracy of the information presented in the financial statements. The financial statements were prepared according to the International Financial Reporting Standards that are issued by the International Accounting Standards Board.”

When should you consider performing a compilation?

If your company is required to present its financial statements in the accepted format or by accounting practices, you should consider hiring an outside accountant to prepare a compilation.

You’ll need compilations when your company is required to present data in a financial statement following GAAP or IFRS standards.

While this is the most common use case, there are also other instances when you might need to perform a compilation. For example, your bank may ask you for a compilation before approving a loan or your investors may ask for compilations.

However, always cross-check with the person who’s going to use the statements. They may require either a review or an audit if they want more assurance than  a compilation provides.

How much does a compilation cost?

Compilation accounting is the least expensive among the three accounting report services. This is because it comes with no examination or assurance that the financial statements are entirely accurate.

However, not all third parties that ask for your financial statements require assurance, so opting for a compilation can be an inexpensive and quick way to present your financial information.

For review engagements, accountants provide limited assurance that the financial statements look reliable, while audits provide detailed analysis of the statements that could take months to complete.

The approximate costs for the three services are as follows:

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What are the advantages of hiring an accounting freelancer to prepare a compilation report?

If you have an in-house accounting team, you can ask them to prepare a compilation report; however, many businesses prefer to hire a freelance accountant. Consider these advantages of hiring an independent accountant for your compilation services.‍

Compilations are prepared by a certified public accountant

Some lenders, investors, or banks may require that your compilation be performed by a certified public accountant who has complete knowledge of presenting the data in an industry-compliant format.

CPAs can also sense-check the data from an outsider’s perspective. Remember, though, that this won’t be a formal audit or assurance of accuracy.‍

Compilations have a quick turnaround time

Compilations typically take less than two weeks to complete, compared to audit reports, which can take several months to finish. So, engaging an independent accountant just for the time needed to prepare your compilation report can be more cost-effective than hiring a full-time accountant.

Compilations are an affordable way to present financial information

A compilation report doesn’t require an accountant to spend the extra time analyzing or giving assurance of your financial statements, making compilations the most affordable level of accounting service.

You don’t need to hire a full-time accountant for this service

Preparing a compilation report requires little time because the financial statements just need to be formatted formally, with no assurance or evidence of transactions required. So, completing this process  can be done cost-effectively by engaging a freelance professional rather than hiring a full-time accountant for this service. This also allows your company’s in-house accountant to focus on other operations that might need their attention.

How to get compilations and financial statements

Choosing between an audit, a review, or a compilation will come down to the needs of your small business. Compilation of financial statements requires no analysis or assurance and can be completed within just one to two weeks. This service is an affordable way for your business to format its financial records in a formal manner without hiring a full-time accountant.

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