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What kind of financial statements do bankers really want?

Michael Kidman Published on 09 February 2012

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It is not unusual to receive phone calls from clients or prospective clients saying, “I need audited financial statements.”

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I have learned over the years what this really means is, “I need some type of financial statements from a Certified Public Accountant (CPA).”

An audited financial statement may or may not really be required.

Audited financial statements from a CPA provide assurance that the financial statements have been properly prepared in accordance with accounting rules and the numbers are “materially correct.”

Bankers are interested in CPA-prepared financial statements because they rely on the numbers to perform an analysis to determine if you can pay them back and how much collateral is available to secure a loan.

They are also interested in the details provided in the footnotes to the financial statements. Well-written footnotes provide a wealth of information about the business’ assets and liabilities.

Let’s review what types of financial statements are available from CPAs and how much assurance is being given.

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Financial statements with an audit opinion provide the highest level of assurance that the financial statements can be relied upon. The auditor expresses an opinion that the financial statements present fairly, in all material respects, the financial position of your business.

The focus of an audit is obtaining verification from outside sources that the numbers on the financial statements are correct. An audit also requires the auditor to comment on deficiencies in internal control that are noticed during the performance of the audit.

Banks request audits when the amount being loaned is large for their bank or the bank is concerned about repayment risk.

Financial statements may be associated with what is known as a review report or reviewed financial statements. When a review is performed by a CPA, he does not follow auditing standards to perform the work. He follows a different set of standards known as the Statements on Standards for Accounting and Review Services (SSARS).

Under these standards, the CPA is required to make inquiries and perform analytical procedures to determine whether material modifications are required to be made to the financial statements.

Much less work is done for this type of engagement – no work is done on internal controls and the fee typically is much less than for an audit. For many of our firm’s clients, bankers have found that reviewed financial statements have met their needs.

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Financial statements may also be associated with what is known as a compilation report or compiled financial statements. Compilations are also performed following the standards set forth in SSARS. A compilation report tells the reader that the financial statements have been presented in a proper format.

No procedures have been performed to determine whether material modifications are necessary and certainly no auditing procedures have been performed. Still, in some situations, a compiled financial statement from a CPA can be very useful and meet the banker’s needs. Compilations typically cost even less than reviews.

So how do you know if the banker really needs audited financial statements or whether you might be able to give him a less expensive product? The very best way is to take your CPA to a meeting with your banker.

In that way you can have a good discussion about any concerns the banker may have about your financial operations and the CPA can review the different options available in receiving financial statements associated with some level of CPA assurance.

I find that these meetings are almost always productive and help give the banker the confidence that you are really taking ownership in providing the financial information he needs. I have also found that bankers look very favorably upon a business willing to have a team of professionals helping them succeed.

Sometimes, when your CPA has a strong reputation in the community for producing quality financial statements, the banker may determine that one of the lesser expensive options will meet his needs. The banker may realize that, based upon the risk of the loan, a review or compiled financial statement may be sufficient for his files.

Remember, however, that sometimes based on the size or nature of the loan, the banker is only requesting what he must have as determined by the policies of the lending institution.

One thing is for sure, if you only ask for audited financial statements and don’t discuss your options with your CPA and your banker, you have asked for the most expensive product that a CPA sells. PD

PHOTO:
TOP RIGHT: So how do you know if the banker really needs audited financial statements or whether you might be able to give him a less expensive product? Photo courtesy of thinkstock.com .

Michael Kidman
Accountant/CPA
Jones-Simkins PC

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