A compilation puts management's numbers into proper form with no assurance; a review adds limited assurance from inquiry and analytical procedures; an audit gives reasonable assurance and an opinion, based on testing. What a lender needs rises with the size and complexity of the credit. For companies with $10M to $100M+ in revenue, reviewed statements are common for bank and asset-based credit, and audits are more likely on larger credits, shared loans and some private credit funds. Ask what the lender requires before paying to upgrade: the requirement often starts after closing.
- Compiled
- CPA presents management's figures; no assurance
- Reviewed
- Limited assurance from inquiry and analytics; CPA must be independent
- Audited
- Reasonable assurance and an opinion, based on testing
- What lenders check first
- That the statements reconcile to the tax returns and the bank statements
- Before upgrading
- Ask the lender; a higher level can often start with the next fiscal year
Three levels of CPA involvement
Accountants in the United States offer three standard services on a private company's financial statements, each governed by professional standards and each producing a different report. What separates them is how much the CPA does to check the numbers, and so how much a reader can rely on them.
A compilation is the CPA arranging the company's own figures into financial statements in an accepted format. The accountant reads them for obvious errors but verifies nothing, and the report says so: no assurance is given. A compilation may leave out most footnote disclosures if the report says it has. The accountant does not have to be independent of the company, though a lack of independence must be disclosed. Below this sits a preparation engagement, where a CPA prepares statements without issuing a report at all.
A review adds limited assurance. The CPA asks management questions about the accounting and performs analytical procedures: comparing this year with last, checking that ratios and relationships make sense, following up on anything unusual. The report says the accountant is not aware of material changes needed for the statements to conform to the accounting framework. A review does not test transactions, confirm balances with banks or customers, or observe inventory. The CPA must be independent.
An audit gives reasonable assurance and a formal opinion on whether the statements present fairly, in all material respects, under the framework used, usually GAAP. The auditor gains an understanding of internal controls, tests transactions and balances, confirms cash and receivables with third parties, observes the physical inventory count and examines the evidence behind significant estimates. It is the only one of the three that tests the numbers against outside evidence.
Side by side
| Compiled | Reviewed | Audited | |
|---|---|---|---|
| Assurance | None | Limited (negative assurance) | Reasonable, with an opinion |
| What the CPA does | Formats management's figures; reads for obvious errors | Inquiry and analytical procedures | Tests transactions, confirms balances, observes inventory, understands controls |
| CPA independence | Not required, but disclosed | Required | Required |
| Footnote disclosures | May be omitted | Full | Full |
| Relative cost and effort | Lowest | Moderate | Highest, by a wide margin |
| Company time required | Little beyond clean books | Some: questions and supporting schedules | Substantial: documents, confirmations, count observation |
| Where lenders commonly accept it | Smaller bank credits and add-on reporting, alongside tax returns | Bank term loans and revolvers, asset-based lines, annual covenant reporting | Larger and shared credits, some private credit funds, companies with outside investors |
What lenders actually require, and why
A lender's question is simple: can it trust the earnings figure it is lending against? The level of statement it asks for depends on how much weight it puts on that figure and what else it has to check it with. Whatever the level, every lender reconciles the statements to the tax returns and the bank statements, and a gap nobody has explained slows a file more than the absence of an audit does.
Banks lending to companies with $10M to $100M+ in revenue commonly ask for reviewed statements, and accept compiled or company-prepared statements plus tax returns at the smaller end or where the relationship is long. Audits come into the conversation on larger credits, on loans shared among several banks, or where the company has outside shareholders who already require one.
Asset-based lenders rely less on annual statements and more on their own collateral work: the field exam, monthly borrowing base certificates and receivables agings. A company that could not support a cash-flow loan on its statements can often support an asset-based line, because the lender is checking the collateral directly.
Private credit funds vary. Some require audited statements as a matter of policy; many lending to lower-middle-market companies accept reviewed statements, especially when the deal is an acquisition with a quality of earnings report. For acquisition debt the QoE usually matters more than the audit, because it produces the adjusted EBITDA and working capital figures the loan is sized on. See seller financials vs tax returns.
Many lower-middle-market loans close on reviewed statements plus tax returns. The audit is rarely the thing standing between a sound business and a loan.
Before you pay to upgrade
Owners preparing for a financing sometimes commission an audit on the assumption that it will make them more financeable. Sometimes it does. Often it is unnecessary, and there are practical reasons to ask the lender first.
- The requirement may start after closing. Loan agreements set the level of annual statements the borrower must deliver going forward. A lender that wants reviewed or audited statements will often accept the current level to close and require the higher level from the next fiscal year-end.
- A first audit can be hard to do backward. An auditor needs comfort on opening balances. If no one observed last year's inventory count, the auditor may have to rely on alternative procedures or qualify the opinion, which does not help the loan.
- It will not fix the books. An audit reports on the statements; it does not reconcile them to the tax returns, move them from cash to accrual or build a debt schedule. Those are what underwriting stalls on.
- It is a recurring cost. Once a loan agreement requires audited statements, the business pays for an audit every year of the loan. Count that in the all-in cost.
The better use of the money before a financing is usually to get the books in order: monthly closes, accrual-basis statements, a year-to-date P&L through last month-end, a debt schedule that matches the balance sheet, and a reconciliation between the statements and the tax returns.
When an audit is worth doing
There are cases where an audit earns its cost. A company planning to raise from institutional investors or to sell to a larger buyer will likely need audited history anyway, and starting early builds the multi-year record those buyers ask for. A company whose financing is large enough that the lenders it wants to reach require audits should plan for one. A business with complicated revenue recognition, significant inventory, percentage-of-completion contracts or several related entities may find that an audit settles questions lenders would otherwise keep asking.
In those cases, plan it before year-end so the auditor can observe the inventory count and confirm balances as of the right date, and tell the lender it is under way. A lender can underwrite on reviewed statements with an audit in process more comfortably than on no plan at all.
Covenant reporting: the level you agree to keep
The statement level matters twice: once to get the loan, and again every year under the reporting covenant. Most loan agreements require annual statements at a stated level within a set time after year-end, interim statements during the year, and a compliance certificate showing the financial covenants were met. Missing the deadline, or delivering a compilation where a review was required, is a default in its own right.
That is a term to negotiate, not accept. If the lender asks for audited statements from year one, ask whether reviewed statements will do while the loan stays below a certain size, or whether the requirement can start with the first full fiscal year after closing. Lenders often agree, because what they want is reliable reporting, and a review from a firm that knows the business delivers it. Check the delivery deadline too: an audit takes longer to finish than a review, and a deadline set for one can be hard to meet with the other.
How Midas Partners uses what you have
Midas Partners builds the lender package from the statements the business already has, whether compiled, reviewed or audited, together with its tax returns. Software does the analyst work and a senior banker checks every page: the underwriting memo rebuilds earnings from those statements, shows its arithmetic against the returns, and says plainly what level of statement a lender is looking at, so the question is answered before a lender asks it. The file then goes to lenders whose requirements it meets. Of the 1,800+ lenders in the book, some underwrite on reviewed statements as a matter of course, and those are the ones a company without an audit should be talking to. See how we underwrite.
Common questions
- Do I need audited statements to borrow from a bank?
- Not always. Many banks lend to companies of this size on reviewed statements plus tax returns, and some accept compiled statements on smaller credits. Audits become more likely as the loan grows, when several banks share it, or when the company already has outside investors.
- Is a review much better than a compilation in a lender's eyes?
- It is a real step up: the CPA must be independent and must investigate anything that looks wrong. For many bank and asset-based credits it is the level lenders ask for. It still involves no testing, so it does not replace an audit where one is required.
- Can a lender accept compiled statements now and require a review later?
- Often, yes. Loan agreements set the level of annual statements going forward, and lenders commonly let a borrower close on current statements and deliver the higher level from the next fiscal year-end.
- Are internally prepared statements acceptable?
- At the smaller end of bank lending, sometimes, when they reconcile to the tax returns. Lenders will ask more questions, and the reconciliation matters more, because no outside accountant has looked at them.
- Does an audit replace a quality of earnings report in an acquisition?
- No. An audit gives an opinion on historical GAAP statements; a QoE analyzes adjusted EBITDA and working capital, which is what acquisition lenders size the loan on. See quality of earnings vs audit.