Many small companies do not regularly produce and maintain financial statements. Often an owner scrambles to provide his accountant with the information from assorted receipts, billing statements and loan documents to prepare the business’s annual tax returns. Other small-business owners use their businesses as an extension of themselves, paying personal expenses from business accounts and vice versa. For lenders and investors, this increases the need and importance of obtaining certified financial statements from a neutral third party.
The income statement is another name for the profit and loss statement. It shows the revenues the company generates, the expenses it incurs and the profit or loss that results over a specified period, typically a quarter or year. The owner, an employee or a bookkeeper must first prepare the income statement. The income statement must use the same accounting methodology throughout.
For income statement certification purposes, a company can engage a certified public accountant or CPA firm to prepare, review or audit its financials. "Prepare" means the CPA firm simply compiles the income statement based on the information provided. "Review means the CPA firm reviewed the information provided to check for inconsistencies and errors; "audited" means the CPA statistically fact-checked all the information in the financial statements. Audited is the most expensive; compiled is the least. The company must sign an engagement letter with the CPA firm clearly stating the scope of the firm’s duties.
The CPA in charge of preparing, reviewing or auditing the income statement will provide the owner or manager with a list of information she needs to perform her duties. The sooner the company provides all the items on the list, the sooner she can finish. She may request additional items as she goes along in a review. Owners must be aware that CPAs cannot review or audit an income statement alone. Financial statements are linked, so the CPA will provide the final balance sheet, income statement and cash flow statement at the culmination of a review or audit. Because "compiled" sets no standard of evidence for the CPA, a CPA can solely compile an income statement.
At the culmination of a successful review or audit in which the CPA found no material inconsistencies, problems or concerns, the CPA will provide the final financial statements with a cover letter. That letter discusses the level of engagement and attests to the lack of findings. The CPA signs the letter to certify what he wrote.
The Sarbanes-Oxley Act of 2002 mandates that chief executive officers and chief financial officers certify that the information contained in financial statements represents the company’s actual situation. Although this requirement does not legally apply to most small, for-profit businesses, some include it to show that the CEO and CFO are fully briefed on and aware of the financial activities and have nothing to hide. Companies provide this self-certification to the CPA firm for inclusion with the CPA-certified statements and certification letter.