For most small business owners, the day-to-day accounting needs of the business primarily focus on two things: management accounting (maintaining an accurate record of the company’s accounting that can be used to effectively guide management decisions), and tax accounting (ensuring ongoing compliance and preparation for annual tax filings). However, there are times when a third objective comes into play: attestation.
Attestation is the process whereby a Certified Public Accountant (CPA) provides a specific and impartial review of one or more aspects of the accounting associated with the enterprise, and expresses a professional opinion regarding the reasonableness of what is presented. For example, an audit is one form of attestation, and is the one with which most people are familiar, at least conceptually.
The purpose of attestation is to provide a specific level of professional evaluation and confirmation regarding the state of the company’s accounting. The CPA in an attestation engagement is “attesting”, on the basis of his or her evaluation and professional reputation, to some aspect of the company’s accounting.
There are three levels of attestation commonly employed: compilation, review and audit. Each of these levels builds successively off the core elements established by its predecessor. Put another way, the compilation offers the most restricted level of attestation, and the audit offers the most comprehensive level of attestation.
Level 1: Compilation
In a compilation engagement, your CPA will prepare (compile) a set of financial statements, but will not express a professional opinion regarding the nature or accuracy of what is compiled. In other words, a compilation does not provide any assurance value.
However, compilations can be useful because they structure financial data into a format that is consistent and follows widely accepted standards. In layman’s terms, the compilation organizes your accounting and files everything in the right place, allowing for a clearer picture of the information contained within.
Level 2: Review
Whereas a compilation engagement focuses primarily on organizing information, the review builds on this foundation and goes one step further. In a review, the CPA evaluates and expresses limited assurance that there are no modifications or changes which must be made to your financial statements that would be necessary in order for them to conform with accounting standards (such as GAAP).
In this sense, the CPA is both organizing the information into the right files, and is then offering a qualified and limited statement saying that in looking at the files, everything appears to be in the right place.
Level 3: Audit
Audits are the most intensive form of attestation engagement, and result in a comprehensive level of assurance as a result of the process. In an audit, the compilation is performed and the review is executed, but far beyond that, the CPA firm will also perform a rigorous and in-depth analysis of all aspects of the accounting operation and supporting documentation or data, to ensure that information is accurate and based on sound sources.
Some organizations are required to have regular audits (such as publicly traded companies and nonprofit organizations), whereas others will have an audit to satisfy certain conditions (such as requirements from bonding companies, financial institutions, government agencies or private investors).
Considering the Right Level of Attestation
The Dodd-Frank Act and other recently enacted financial regulations have placed more scrutiny on accounting standards, often leading to more requests or requirements for full-blown audits. However, a full audit is a very expensive and time-consuming process, one that is often unreasonably out-of-reach in both time and investment for small businesses. As a result, audits are becoming increasingly rare as the option of choice, as businesses shift in favor of compilation or review in more cases.
As a result, it may be useful in many cases to consider a lower level of attestation when some form of attestation is required or requested. For example, a bonding company, lender or creditor working with a small construction company may consider accepting a review instead of an audit as a satisfactory level of attestation.
Small businesses owners would do well to familiarize themselves with the distinctions, differences and benefits associated with all three levels of attestation so that they can discuss all three levels as options with those parties to whom an attestation may be important for a transaction. To learn more about how the three levels of attestation may be relevant to your small business, contact your professional CPA today.
- AICPA Levels of Authority
- Understanding the Levels of Attestation
- Audit, Review or Compilation? Choosing the Appropriate Attestation Engagement for Your Organization
Image Credit: Dave Dugdale (Flickr @ Creative Commons)