Compiled, reviewed, audited: what each one actually buys you

A lender asking for "CPA-prepared financials" is not asking for one thing. There are three distinct levels of service under US professional standards, they involve completely different amounts of work, and the gap in cost between the cheapest and the dearest is usually an order of magnitude. Buying the wrong one is a waste; being asked for one and not knowing the difference is worse, because you end up buying what the accountant suggests rather than what the lender needs.

The three levels, in ascending order

There is a fourth thing that is not on this ladder at all: a prepared financial statement, where the accountant assembles statements for your internal use with no report attached. Some lenders accept it; many treat it as equivalent to internally prepared.

What each level changes in underwriting

Nothing about the level changes your numbers. What changes is how much independent testing sits between the analyst and your bookkeeping, and therefore how much of their own adjustment they need to make.

• Internally prepared. Accepted across most revenue-based, bank-statement and smaller working capital products, and at the lower end of bank lending. Tested by tying to the return, the bank statements and the debt schedule.
• Compiled. Removes the format objections and signals that someone outside the business has seen the file. Does not remove a single verification step, because there was no verification.
• Reviewed. Starts to matter at larger bank facilities, at asset-based facilities, and where a covenant package needs periodic certified reporting. The analytical procedures behind a review catch the category of error — a margin that moved six points with no explanation — that an internal set would carry unexamined.
• Audited. Required by some covenant packages above a size threshold set by the lender, by some franchisors and licensing bodies, and in acquisition finance where the buyer's lender is relying on the target's numbers. Rarely required for facilities at the size most small businesses borrow at.

The decision procedure

1. Has anyone actually asked for a level? Read the term sheet or the document request literally. "CPA-prepared" most often means compiled or reviewed. If it is ambiguous, ask which report they need, in writing, before you commission anything.
2. Is it a closing condition or an ongoing covenant? A one-off requirement to close is a one-off cost. An annual audited requirement is a permanent line in your overheads for the life of the facility, and it is negotiable at term sheet stage far more often than people try.
3. What is the cost against what it buys? Get a written fee quote for each level from your accountant and ask what the price difference actually changes in the offer. If nobody can name a change in amount, rate or covenant, the answer is the cheaper level.
4. Can the requirement be stepped? Reviewed in year one, audited only if the facility exceeds a stated balance, is a normal negotiated position. So is audited only if a covenant is breached.
5. Do you have the records to support the level you are buying? An audit of a business with no inventory counts, no signed contracts on file and no supporting documentation for related-party transactions will be expensive, slow and possibly modified. Fix the records first or the money is wasted.

What none of them fix

An accountant's report attaches to the statements. It does not attach to your bank statements, your tax return, your deposit pattern or your time in business. A reviewed statement showing healthy profit alongside three months of statements with eleven negative days will not carry the file; the statements and the behaviour disagree, and the behaviour is the document nobody prepared.

Nor does any level of service make a number true that was not. The accountant works from what you give them. At compilation level, an error you introduce passes straight through. At review level, it passes through unless it is large enough to distort a ratio. Only an audit is designed to find it, and even then only to a materiality threshold.

What to ask for and what to refuse

Ask your accountant for a written quote on all three levels, the turnaround time for each, and what they would need from you. Ask the lender, in writing, which report satisfies the condition and whether it is required at closing or annually thereafter.

Refuse to commission an audit on a verbal suggestion. Refuse an ongoing audited-statements covenant on a facility whose size does not justify the annual cost without at least asking for a reviewed alternative or a size-based step-up. And if the request came from a broker rather than the funder, confirm it with the funder — a requirement that appears in the middle of a process and cannot be traced to an underwriting condition is worth questioning before it is worth paying for.