YOUR BANK WANTS WHAT?

By: Ricky Longoria, CPA, CFE - Partner (Posted: 10/23/2013)

With most any bank loan, the submission of financial statements is an integral part of the process. Up until a few years ago, it was not uncommon for banks to be satisfied with financial statements prepared solely by their customers. However, strict internal bank policies and external regulatory demands now require banks to obtain better financial information in support of their lending activities. Banks are looking for increased levels of assurance regarding financial statement information and are asking their customers to turn to a Certified Public Accountant (CPA) to provide it. In most cases, lenders are asking that financial statements be compiled, reviewed or audited. As each option requires an additional cost to obtaining a loan, it is important to understand the fundamental differences between them.

A compiled financial statement only requires the CPA to ensure the fairness of the presentation of the financial statements in accordance with an acceptable basis of accounting. The most common bases are cash, income tax or accrual. When reporting on compiled financial statements, the CPA has no responsibility to provide any assurance regarding the amounts presented. Of the three options, compiled financial statements are the least costly. A reviewed financial statement requires the CPA to not only ensure the fairness of the presentation of the financial statements in accordance with an acceptable basis of accounting but also requires the CPA to perform certain inquiries and analytical procedures. These procedures allow the CPA to provide limited assurance regarding the amounts presented in the financial statements. Finally, an audited financial statement requires the CPA to render an opinion on the fairness of the presentation of the financial statements. Depending on the outcome of the audit, the CPA’s opinion can vary from unqualified to disclaimer. An audit provides the highest level of assurance to the bank. However, cautionary note - an audit will never provide absolute assurance nor remove management from their responsibilities regarding the amounts presented in the financial statements. An audit is typically the most expensive of the three options.

As banks require better financial information from their customers, it’s important to understand the options. It is reasonable to expect that larger loans require greater levels of financial statement assurance. We recommend clients meet with a CPA prior to the closing of a loan to ensure that everyone is on board as to the reporting requirements required by the bank. If you would like to discuss your bank’s financial statement reporting requirements, we encourage you to call Ricky Longoria, CPA, CFE or Ben Pena, CPA, CFE at Burton McCumber & Cortez, LLP.