Audited, Reviewed or Compiled: What Your Bank Needs

The names vary by country and the professional standards behind them are international, but the ladder is the same everywhere: each rung means someone checked more, and costs more, and takes longer to arrive. The first thing a credit analyst reads on a set of annual accounts is the page that says which rung they are on — the compilation report, the review report, or the auditor's opinion — because it decides how much of the rest the desk has to check for itself.

For an owner-managed business of modest size, usually not an audit. Most commercial lending to smaller businesses runs on compiled annual accounts, a monthly or quarterly pack during the year, and what the bank sees in the account itself. The request moves up the ladder as the exposure grows, as covenants start to be tested on the annual accounts, when several lenders share the risk and need the same numbers, or when a group is complex enough that nobody outside it could assemble the picture. Each bank sets its own lines in its credit policy, and when a company must be audited by law is a separate question that depends on its size and ownership under local rules.

Where the answer for your business lives is the facility letter: its information undertakings name the level of the annual accounts the bank needs and how many days after year end they are due. That deadline is a covenant like any other, and late annual accounts are one of the earliest signals a desk acts on.

Compiled accounts. The desk knows nobody tested them, so it tests the ties itself. Revenue against the tax returns and against the deposits it sees going through the account. Receivables against the aged debtors listing. Stock against how fast the business turns it. Related-party lines, which a compilation will record and nobody will have questioned. None of this is suspicion; it is the work the rung below an audit leaves for the lender, and a set of compiled accounts whose ties hold is perfectly good evidence.

Reviewed accounts. Worth more on the things analytical checks catch — a margin that jumped, a cost line that vanished — and little more than a compilation on whether the debtors and the stock exist, because nobody counted or confirmed them. The desk reads the review report for any matter the accountant flagged, and still does its own ties on the balance sheet.

Audited accounts. The strongest evidence that the numbers are what they say, and still not a credit read. The opinion covers whether the accounts present the year fairly; it says nothing about whether the business can repay, whether the profit became cash, or whether next year looks like this one. Issue 07 is a listed group — audited, board-approved, followed by analysts — and the reading still turns on quality of earnings: profit up, cash down, and a dividend a lender declined. The desk reads the opinion page first — clean, an emphasis of matter, qualified, a going-concern doubt — and each one changes the file. A change of auditor, or accounts signed later than usual, is read too.

For most small businesses the best evidence a bank has is not the annual accounts at any level of assurance. It is the account: every deposit and every payment, month after month, which is why a bank that holds the transaction account reads a business better than one that only holds the loan. It is the monthly pack and how punctually it arrives. It is the aged debtors listing, the tax position, and the difference between what you forecast at the last review and what happened. A business with compiled accounts, a clean account and a punctual pack is often a better-evidenced borrower than one with audited accounts that arrive six months late. How Banks Read You is the order all of it is read in.

It usually happens at a larger request, a refinancing, a first covenant, a change of ownership, or a file that has started to worry someone. Ask what the bank is worried about, because the cheapest answer depends on it. If the concern is the debtor book, a specific set of checks on the debtors by your accountant — an agreed-upon procedures engagement — may answer it at a fraction of an audit's cost. If the concern is the numbers a covenant is tested on, a review may be enough. If other lenders, a buyer or a regulator will rely on the accounts, an audit is the answer and arguing is wasted effort. Agree the timing as well as the level: a first audit takes longer than the ones after it, because the opening balances have to be checked too.

And weigh it against the margin. A bank that cannot see well prices for what it cannot see, and asks for more security or tighter terms. An audit or a review costs money every year; so does the uncertainty it removes, in the rate and the conditions. The comparison belongs in the same conversation as pricing and fees.

Late annual accounts. The most common, and read before anyone opens them. Year-end numbers that disagree with the pack. A year of management accounts that the compiled or audited accounts then restate is a question about every pack that came before. Changing accountant or auditor without saying why. The desk will ask; answer first. A qualified opinion the bank finds on its own. Tell it before the accounts arrive, with the reason and the remedy. Treating an audit as a clean bill of health. It is evidence the numbers are right, not that the business is safe to lend to — the difference From Audit to a Credit Desk is about. Paying for the wrong rung. An audit bought when the bank only needed a check on the debtors.

The one your facility letter names, delivered on time, agreeing with the pack you sent all year. For an owner-managed business borrowing a modest amount that is usually compiled accounts, and the desk would rather have them early than audited accounts late. As the borrowing grows, or covenants, other lenders or a sale arrive, expect to move up the ladder — and when the bank asks, ask what it needs the accounts to show, and buy the rung that shows it. The application guide covers the rest of what goes in the pack, and the question each piece answers.