Transcript
Hi everyone, welcome back to Janus podcast. Today we're going to be talking about reviewed financial statements. I'm here with AJ Singh, our CPA and EA. Hi everyone. Let's just get into it. First things first, what is a reviewed financial statement? >> There are various levels of assurance. We have compiled financial statements, reviewed financial statements, and audited. So, a reviewed financial statement is an assurance service that we provide. We provide reasonable assurance that the financials are in accordance to generally accepted accounting principles. A compilation, which is like a lower level, actually it doesn't provide any assurance at all, is basically taking the management's financial statements and presenting them according to an accounting framework. And then an audited financial statement provides reasonable assurance as the highest level of assurance that you can get from a CPA. So, the levels would be a compilation, a review, and then an audit. >> That's correct, yes. At Janus, we provide mostly reviewed financial statements, but we also work on quite a few compilations as well. So, you know, compilations and reviews, probably just talk more about, you know, the differences. So, as as an outsider looking into whatever I've told you, what what are the questions that that pop in your mind? Yeah. So, when would a business owner need a reviewed financial statement versus a compilation? When a business is smaller, they have simpler requirements. For example, a small loan, they can go for something like a compilation, which doesn't provide any assurance at all, but it puts the financial statements in a particular format that outside banks and third parties like surety companies can understand because it's formatted according to generally accepted principles. And then a reviewed financial provides more assurance. So, those larger requirements by lenders or maybe a bigger company, they would want a reviewed financial because they want that limited or moderate amount of insurance. So, the lender might want that limited insurance or moderate insurance to get more confidence on the financial statements. And then on the other side, when would you need an audit versus just a reviewed financial statement? >> So, again, it's all dependent on those financial institutions or that third party, what level of assurance they want. The audit's going to give them the highest level of assurance, and it's going to be a lot more expensive, too. So, there's more testing, internal control testing, you know, audit sampling that happens. So, the procedure is a lot more extensive, a lot more inquiry. The compilations are the the lowest cost because we're just taking the financial statements prepared by the client in most situations and putting them into a specific format. The reviewed financial statements, we're kind of comparing the current financials to prior periods, identifying or analyzing why something might have changed in the balances, let's say loans. Those are material balances that, you know, make a difference to the end user will be identifying why they changed, and this uh normally means reviewing documents. It's more extensive than a compilation because now we're actually checking documents. We're requesting documents. We're making inquiries of management. >> On average, what does a compilation cost versus a review versus an audit? >> Yeah, so so a range that I can kind of tell you from our firm, a compilation may be around $1,500, and it just depends if the lender wants it with notes or without notes. Okay. What does What does that mean with notes or without notes? Now, with with a compilation, you have the choice of having notes or not having notes. And it really depends on the party that's requesting them. Notes, or you can call them footnote disclosures, it really provides more context to the financial statements that you're presenting. So, it could be a better explanation on related party transactions, contingent liabilities, and maybe some accounting policies. So, it just provides more context to the financial statements, and it does raise the cost of the compilation a little bit more. So, a compilation is about $1,500, and that's likely without notes. No, the $1,500 price tag is probably with notes. With notes. Is it common to see lenders or banks asking for a compilation without notes? Yeah, it is. We we see that, but also I think more commonly we get requested with notes because, you know, those lenders want more context. Lenders or surety companies, I would probably say it's like half and half. And then, you know, going back to your earlier question, a reviewed financial, the pricing differences, a reviewed a reviewed financial would be costing around about $10,000 for most of the clients that we serve because they're at that level, but we can bill less depending on the the the size of the company, the number of accounts that need to be reviewed, the cost can be less. So, it can be from $5,000, and for a larger financial statement with more balances to review, the cost can go up to around $10,000 average. And then audits? Well, audits are, you know, a lot more extensive, a lot more inquiries, a lot more procedures, testing, and those can cost anywhere from $20,000 to $40,000, which is the typical audit range that we deal with. Do you want to share a story of the last review, the the company, the sizing of the company, why they were getting why they're asking for reviewed financials? The last review that we worked on is trucking and logistics industry. We are specialists. So, I think that is very important for whoever the CPA is who's reviewing the financials, they should be experienced in that industry. I think that is very important because you know what to look for. It helps with the increase in analytics. It helps with getting to the issues that need to be resolved in these engagements. So, revenue-wise, they were around the 50 million range. You know, we were looking at loans. We were looking at assets. And assets are typically those hard assets like trucks and trailers. Often times, these logistics companies, they have related companies as well. So, we have to really look into and delve deeper into the related party transactions. So, in this case, they were asking for reviewed financial statements because they needed it for a bank or because it's part of their The lenders requested it because of the size of the company, because the revenues, something like a review would make sense for them. They want to get a better understanding. They want to get some assurance on those financial statements. Typically, a company that that big with that much in revenue, um the lender would ask for a review. So, I know some companies are required to be audited at the end of every year. So, is this the same idea where they have to do every year? So, with a review, once you have your first year review, then the lenders that you're most likely going back to on a regular basis for more funding, they will typically want a review to be done again. If you're having a review done once, then it makes sense that you have those every single year because then the lenders are comparing apples to apples. We We do see a lot, you know, of course, people Our clients may start off with a compilation and then graduate to a review. You know, especially if the if the client is very small, small medium-sized business where the the bank is asking for a reviewed financial statement, we will suggest, you know, to save costs, hey, can you get away with a compiled financial statement? What are some common reasons other than a lender asking that somebody might need a review? We We don't typically get those requests, but, you know, a situation could be that when you're going through a compilation or review, well, a review specifically, you're really getting the proper presentation of your financial statements, where inquiries have been done, balances have been reviewed, they've been checked. It's pretty accurate compared to an internal financial statement or even a compilation. So, you know, along with the review, the internal process for our analytics is comparing ratios. So, we're comparing uh ratios from one period to the next, why they changed. That information, although we can give that separately to the client as well, as part of the review process, you know, it's added value. So, now they're getting well-presented financials, accurate financials, they're also able to see analysis, ratio analysis from one period to the next. And sometimes, you know, you have management, they want to have that level of assurance because they want to review it annually, maybe for their board meetings or their investors. Well, again, that's going to be third-party requests again. What are some common problems you see come up when first-time business owners do a review or when business owners do their first review? That's an excellent question. Clients don't understand the amount of inquiry that goes on with a reviewed financial statement, and they think that, okay, they've done their financial accounting, they've updated the books, and they're good to go. They're just going to give us the financial statements, and we're just going to be doing almost like compilation. We need to do our own analytics. We need to do more digging and make sure that the balances that are shown on those financial statements are accurate. We're providing limited assurance. So, I think that's what catches many clients off guard is all the documentation that they need to provide us, bank statements, credit card statements, disclosing related party transactions, you making sure there's no commingling between business and personal transactions. That's that's a lot of work. If you aren't planning your first year review, that makes it even more difficult. Suddenly, the year turns around, the first quarter has passed, and now your lender's asking you for a reviewed financial statement, and you haven't even planned for it. So, that's like a big issue. Um cuz that's going to cause delays. And so, working with an experienced CPA, having that industry expertise really helps. And, you know, working in certain industries like, you know, construction, logistics, trucking, dealing with not-for-profits for the last 15 years, it really helps us try to get to those numbers a lot faster. And, of course, you know, we are introducing a lot of new technology. We've developed our internal portal, which helps us stay in touch with the client, follow up requests through our automations. The client has access to the portal as well, so they can keep track of the engagement. We're also introducing other automations to our clients, specifically for those industries that I've mentioned, to speed up a lot of that reconciliation that happens on the client's end, help things move along a lot faster. And so, we can complete those engagements, hopefully in time for the bank to make a a decision. >> That's a good point. So, about how long does each of these requests take, a compilation versus a review? So, a compilation could be done within a couple of weeks as soon as we get the financial statements. And a review should be taking around a month. First-time reviews can take a little bit longer. A lot of our focus over the last few years has been how to speed up those engagements, because I think timing is very important. There's a lot of work that goes on with these engagements. You know, speeding things up internally on our end is is crucial. The cool thing about the portal is when we request documents from you, we'll upload it straight there. You can see what is requested of you, and you'll go in and and put it yourself, rather than before you contact your CPA, they need X, Y, and Z from you, you send two of the three documents, you go back and forth a million times, you never know what's missing, and it's not clean. This way is a secure way to upload your documents. You can see exactly what's needed from you, exactly what's missing. And it's also a way to contact our team directly. So, if you have any questions, you can go to the chat box. You can send a message, and you'll get a response within most likely 24 to 48 hours. There's a lot of intelligence built into the portal itself. That's what's really going to keep the client engaged. It knows when to reach out. Um and it just, like you said, it reduces the back and forth. >> So, when they first send a message, is it AI bot, or is it a person? It can be either. Is it dependent on what the question is? So, through that portal, you can ask for um an individual team member. But, let's suppose that the client needs a specific document. They They want their 2025 financial statements. They just type it in, and it's going to present it to them. But, if there's a question, then? If it's a specific tax or accounting question, then it's going to go to a team member who can answer it. Okay, cuz I want to highlight that, cuz a lot of people hate AI chat chat boxes. So, I want to highlight that no, you will get a team member when you're asking a specific question. It's a very smart model. Mhm. Exactly. So, if you need a document, it'll present the document to you. For specific questions, tax or accounting related, specific engagement questions, you are going to get a team member. And a team member can call you and give you that information. So, what are some final things that you believe business owners should know about reviewed financial statements? So, if you plan to do one of those engagements that we've talked about, a a review especially, and definitely for an audit, planning needs to happen before you close out your calendar or fiscal year. So, sit with our team. We want to make sure that the client knows what to expect, so it's not a shock. You know, there are certain things that are expected between, you know, a compilation and a review. Compilation, not so much. Review, definitely, there's a lot more inquiry. And looking at those financials before year end, so that you know, when the year turns around or where your fiscal year ends, you are in a position to provide those requested items at a much faster rate. Of course, we will do our best to really speed up those engagements, and make it as easy as possible, especially for those first-year reviews, to um get those financials into the hands of our clients and those third parties that have requested them. Thank you so much for tuning in to the GNS podcast and learning about reviewed financial statements. If you yourself are requesting [music] a reviewed financial statement and want to meet directly with our CPA, you can call us at 909-217-7855. [music]