All publicly traded companies in the U.S. must provide regular financial statements to their investors and to the public. This information is required by law by the Securities and Exchange Commission (SEC).
These statements give investors a financial snapshot of a company's immediate past performance. Financial results are important to investors because they have a vested interest (their money) in how a company is performing.
There are two categories of financial statements that companies can release: certified and compiled statements. Below are the differences between them.
- A certified financial statement has been audited for accuracy by an independent accountant.
- A compiled statement may provide investors with useful information but it has not been audited.
- The quarterly and annual reports issued by public companies are certified financial statements.
Certified financial statements are the documents that all publicly traded companies must publish. Quarterly and annual company reports fall into this category. These must include:
- Income statements that detail a company's profit or loss during a specific period of time
- Cash flow statements that show its cash inflows and outflows
- Balance sheets that outline its assets and liabilities
A certified public accountant (CPA) will audit the contents of these statements using generally accepted accounting principles (GAAP) to ensure the details are accurate. The CPA is expected to be an independent professional, not a company employee. Once the audit is completed, the accountant will certify the statements.
These statements are generally released to the public. They demonstrate the overall financial health and wellness of the company.
Since the auditing process can be lengthy, certified statements can come at a higher cost to a company.
A compiled statement has been prepared by an accountant but has not been audited or certified.
The usual reason for the release of compiled statements before they are certified is timeliness. The company has financial information that it wants or needs to be released promptly to investors. The certifying process would delay its disclosure.
That means a compiled financial statement is not thoroughly audited and there is no guarantee it is correct. An accountant compiles the financial statement, but it is not required to verify or confirm the numbers or analyze the statement for accuracy.
As a matter of ethics, the accountant who is appointed to compile the statement must be familiar with the company and its business processes. And, an accountant who finds erroneous, misleading, or incomplete information in a financial statement must notify management or abandon the task.
Because there is no auditing involved, these statements can be produced at a lower cost.
Certified and compiled statements contain very similar information about a company's financial status. A compiled financial statement will include figures on income, expenses, cash flow, assets, and liabilities.
As an investor, you can generally trust a certified statement because an audit has been conducted. But when looking at a compiled statement, you need to keep in mind that it has not been audited or endorsed by an independent professional. Most companies will add a disclosure indicating that the statement is a general representation and has not yet been independently verified.
How to Use the Statements
Financial statements that have been thoroughly audited and certified are meant to be trustworthy. Because the audit is conducted by an independent body, they can provide a clear and unbiased picture of a company's financial health.
These are the statements that investors can trust to help them make sound decisions about current or future investments.
The Worst Case Scenario
In the worst case scenario, an honest auditor may detect outright fraud, but a dishonest auditor can help commit it.
For example, the telecommunications company WorldCom inflated its assets in its financial statements to the tune of about $3 billion with the help of an audit company, Arthur Andersen, in a scandal that made headlines in 2002. Both companies are now defunct.
This activity is, of course, illegal, and can have serious repercussions for auditors and management who cook the books, ranging from hefty fines to prison sentences.
The Bottom Line
Companies use both certified and compiled financial statements to show the overall health of their businesses. A certified statement is fully audited and its numbers are deemed to be accurate. A compiled statement may give investors sound information, but is not independently guaranteed.