CPA Reviews: A cornerstone of business success
In this month’s first blog post, we compared compilations, reviews, and audits to exercise. Compilations were like walking, a way for a business to start working on its financial health.
CPA reviews are more like jogging. They’re for businesses with more serious goals or a greater need to stay financially fit.
This post will cover when a CPA review might be helpful, what happens in one, and the benefits.
Let’s go!
When might a business need a CPA review?
Usually, a CPA review is most needed when a business needs outside funding or needs to prove they are being good stewards of funds.
For example, a company might be required to complete a review to ensure it is meeting the terms of a debt covenant.
A non-profit might need outside funding. These usually come from grants or foundations. Having a reviewed financial statement can show these sources the non-profit’s financial house is in order.
Start-ups can benefit from them as well. Reviews put investors and lenders at ease because they offer transparency.
Although there is no set number, businesses with $5-$10 million in annual sales make good candidates for a review instead of an audit.
Here’s why.
Reviews are a lot of work
Just like jogging can leave you huffing and puffing, so can a CPA review.
First, the CPA has to understand your business, so if they aren’t versed in your field, there can be plenty of requests for information on how to best understand the company’s operations, internal controls, and accounting practices.
Once they have the information, it must be analyzed. That requires the CPA to scrutinize financials like balance sheets, cash flow statements, and income statements. This entails reviewing supporting documentation, too. So, be prepared for requests for cash receipts, disbursements, inventory management, and payroll processing.
Tired yet? There are only three more steps to go.
After the financials, the CPA moves on to internal controls to ensure the accuracy of everything they’ve been analyzing. She will probably ask for internal control proofs on all financials, so be prepared to show workflows and answer plenty of questions.
Your employees can brace up, too. There will be lots of interviews and they won’t necessarily meld into the company’s workflow.
Finally, the CPA issues a report. Maybe.
This only happens if no material inconsistencies are found. If some are found, you may have to go back and start at one of the previous steps.
So, what do you get for all this work? A pretty good return on investment as it turns out.
Benefits of a CPA review
Arguably, the most important thing you get is early detection of issues. Business owners can’t see or know everything, and financial problems can develop and fester.
By the time they are known, those problems have caused a lot of damage. Just ask the owners of Collin Street Bakery.
With that early detection comes financial transparency. This is what donors, investors, and regulators care the most about.
Finally, there’s the ability to make better decisions. Having a strong grasp of the numbers means a business can develop better strategies for debt reduction and asset allocation.
The Bottom Line
CPA reviews aren’t for every business. Some can get by with a compilation. Others will need an audit. But if you need transparency and some degree of assurance about your finances, talk to your CPA about the possibility of doing a review.
It might just turn out to be the cornerstone of your business.