Quality financial reporting can increase the value of a business. For an owner considering selling or merging a business, one of the most effective ways to enhance the value of the business is to reduce risk, both actual and perceived. This article focuses on the latter.
When it comes to selling a business, value is in the eye of the buyer, so first impressions are critical. Putting together solid, unbiased financial information can reduce the perceived risk and enhance perceived value on the part of prospective buyers. Accountants offer three basic levels of service: audit, compilation, and review. While a higher level of service is more costly, the investment can pay off in the form of increased value and a higher purchase price.

Audit. An audit is the highest level of attestation. The goal is to obtain an "unqualified opinion," in which the CPA firm states that it believes the financial statements fairly present the company’s financial position as of a specific date, and that the results of operations and cash flows for the preceding year conform to generally accepted accounting principles.
Review. Reviewed financial statements provide "negative assurance." In other words, the CPA firm states that it isn’t aware of any misstatements in the financial statements.

Unlike an audit — in which the CPA tests and confirms evidence supporting the figures and disclosures reported in the financial statements — a review is based mainly on an "inquiry and analytical review." In other words, the CPA’s conclusions are based on making inquiries to management and applying analytical procedures, without the rigorous testing involved in an audit.

Compilation. A compilation involves no testing, confirmation, inquiry, or analytical procedures. The CPA simply compiles data from the company’s financial records and presents it in the form of financial statements. Critics of compilation services say the client merely rents the accountant’s letterhead for financial statements, but that isn’t a fair assessment of the work involved. Even in a compilation, a CPA will point out any glaring errors in the financial statements and will help the client correct them before the report is issued. There’s also a benefit to ensuring that the financial statements are presented in the proper format.

Sellers should generally plan on furnishing about five years’ worth of financial statements to a prospective buyer. Whether these financial statements should be compiled, reviewed, or audited requires a comparison of the additional cost of a higher level of service to the potential of higher prices offered by buyers who feel more comfortable with the company’s financial condition.