Reviewed Financial Statements: Compilation or Review Engagement?

What do "reviewed financial statements" mean, and how do compilation, review and audit differ?

A bank or franchisor that asks for "reviewed" statements most plainly means a review engagement report: an accountant's limited assurance on the statements. The agreement's own wording decides. A compilation is a lower level that gives no assurance, so it is not a review. An audit is a higher level that ends in an opinion.

A corporation's case is not simple when:

• The requirement is a contract term. No government source says what your bank or franchisor requires. Only the agreement can.
• The reporting date is close. A review starts from finished, reconciled books.
• The books do not reconcile. Bank, card, loan or shareholder loan balances that do not agree should be fixed before the work starts: a compilation is built on them, and a review gives limited assurance that the information is plausible.
• Ontario rules may apply. Ontario licensing rules decide who may issue a review, and Ontario's franchise disclosure rule covers franchises operated there. Both are below.

The contract steps apply in any province. The licensing and franchise sections cover Ontario only, and the audit-waiver section covers the federal and Ontario Acts only.

Before ordering any work, get three things: the exact clause, the recipient's written answer on which report levels it accepts, and your reconciled year-end books. The full list is in the last section.

Is a compilation enough when my bank or franchisor asks for reviewed statements?

A compilation is enough only if the agreement accepts one. If the clause says "reviewed" or "review engagement", a compilation does not meet it as written. If the clause says only "financial statements" and names no level, the clause itself does not say; ask the recipient in writing which levels it accepts.

Ontario's compilation engagement report names a balance sheet, a statement of income and retained earnings, and a note describing the basis of accounting (O. Reg. 324/21, section 4). If the clause also lists a cash flow statement, put it in the engagement terms.

What does a review engagement add over a compilation?

A review adds a conclusion from the accountant: limited assurance instead of none. A compilation report says the accountant did not perform an audit or a review and was not required to verify the information. A review is not an audit: the accountant gives no opinion on whether the statements are fair (ISED).

A review changes four things for the owner:

• Assurance. Limited assurance on the statements, which a compilation does not give.
• Who signs. In Ontario, a review a third party can reasonably be expected to rely on is generally public accounting and needs a licence under the Act (see "Who may issue" below).
• The T2. Schedule 141 has a line for a review engagement report and a reservation question that a compilation does not trigger.
• Work for you. The accountant must support a conclusion, so questions about balances and support are likely.

Ask each accountant to quote the report level and the scope separately, so quotes compare. Compilation fees are in compilation engagement cost.

When is an audit required instead, and can shareholders waive it?

An audit comes from a statute or a contract. A corporation that is not a distributing or offering corporation can waive the statutory audit if every shareholder consents; the table shows how long that lasts. A waiver does not lower what a lender's agreement asks for.

The federal regulations define a distributing corporation as, in short, a reporting issuer, or a corporation that has filed a prospectus or registration statement or has securities listed on a stock exchange, among other cases (Regulations, section 2). Ontario's "offering corporation" is, in short, one that is offering its securities to the public (OBCA, section 1).

A waiver removes the statutory audit. It does not make a compilation satisfy a loan clause that says "reviewed" or "audited", and it does not remove the duty to put annual financial statements before shareholders: directors still place them before the shareholders at each annual meeting, with the auditor's report "if any" (CBCA, section 155; OBCA, section 154). The articles, by-laws or a unanimous shareholder agreement can require further information.

What financial statements does my bank want for a business loan, and where does the request come from?

The request comes from your loan agreement or commitment letter, not from tax or corporate law. No government source sets what a business lender asks for, so only the document can say which statements and which report level your lender requires. A franchise agreement works the same way.

Read the clause for these points:

What must a franchisor's financial statements show in its disclosure document for an Ontario franchise?

For a franchise to be operated wholly or partly in Ontario (Arthur Wishart Act, section 2), the franchisor's disclosure document must include either audited statements or statements prepared to review standards, unless an exemption applies. A compilation is not an option on that list. This rule covers the franchisor's document to a prospective franchisee; what a franchisee reports to the franchisor is set by the franchise agreement.

Under O. Reg. 581/00, section 3, a disclosure document includes one of:

• An audited financial statement for the franchisor's most recently completed fiscal year, prepared under generally accepted auditing standards.
• A financial statement for that year prepared under generally accepted accounting principles that meet the review and reporting standards for review engagements.
• A declaration that the franchisor is exempt and meets the exemption criteria.

If 180 days have not passed since the fiscal year-end and the statement is not yet prepared, the document includes the previous year's statement. A franchisor that has operated for less than one fiscal year, or is within 180 days of the end of its first fiscal year with no qualifying statement yet, includes an opening balance sheet.

If a disclosure document falls short, the franchisee may rescind within 60 days of receiving it, or within two years of signing if none was given (Arthur Wishart Act, section 6). A franchisee who suffers a loss can also sue the franchisor and every person who signed the document (section 7). Every document carries a certificate that it is accurate and complete, signed for an incorporated franchisor by at least two officers or directors, or by its only one (O. Reg. 581/00, section 7).

The exemption in section 11 has several criteria, and all must be met. One is net worth of at least $5,000,000, or at least $1,000,000 if the franchisor is controlled by a corporation whose net worth is at least $5,000,000. The regulation measures that net worth from statements that have been audited or for which a review engagement report has been prepared, so a compilation cannot support the claim. The others cover the number of franchisees, years in the line of business and any fraud or franchise-law judgments. The exemption also ends if the franchisor stops meeting a criterion.

Separately, some grants need no disclosure document at all: an additional, substantially similar franchise to an existing franchisee with no material change, a renewal with no interruption or material change, or a franchise whose total initial investment is $15,000 or less, or more than $3,000,000 (Arthur Wishart Act, section 5(7); O. Reg. 581/00, section 9). Whoever claims an exemption must prove it (section 12).

Other provinces' franchise laws were not checked.

Who may issue a compilation, a review or an audit in Ontario?

In Ontario, a review or audit that a third party can reasonably be expected to rely on generally needs a licensed public accountant. A compilation relied on by a third party needs one too, unless it carries the prescribed notice limiting assurance.

The source is Public Accounting Act, 2004, sections 2 and 3 and O. Reg. 324/21, section 2. A licensee must be a member of CPA Ontario (section 4). A person who is not licensed cannot recover charges made as a public accountant (section 37).

The Act counts a review as public accounting when it is done independently of the client (section 2(1)), and the federal description calls a review the work of an independent public accountant (ISED). Ask whether the accountant who keeps your books can also issue the review, and whether the recipient wants someone else.

When a bank will receive the statements, ask the accountant which engagement the work is and whether the person signing holds the licence it needs. CPA Ontario keeps a public Roll of Public Accountants in Ontario, so the licence can be checked (section 21). Confirm rules outside Ontario with the provincial CPA body.

How does the choice show on the T2 (Schedule 141)?

The CRA's GIFI pages do not name a report level as a filing requirement (CRA); the level changes how Schedule 141 is completed. The CRA says to include any notes and the auditor or accountant's report, if prepared (RC4088).

Question 099 reads "Has the person referred to in Part 1 expressed a reservation?" and is answered only if line 300 or 301 was chosen (Schedule 141). Part 1 asks about the person who did more than half of the work preparing the financial information, if anyone did. The lines follow the work actually done, and more than one can apply; the accountant who did the work can say which apply and whether the report carries a reservation.

For what the T2 needs from year-end statements, see year-end financial statements for a corporation.

What should I have ready before a review starts?

A review starts from finished books and the exact wording of the requirement. Gather these before the accountant begins:

1. The loan or franchise clause, and the recipient's written answer on which report levels it accepts.
2. Last year's financial statements and the filed T2, so opening balances agree.
3. Bank, card and loan statements, reconciled to the books at year-end.
4. The adjusted trial balance, with year-end adjusting entries posted.
5. The schedules behind each balance: customers owing, bills owed, loans, the shareholder loan account and equipment.
6. Payroll and GST/HST filings that agree with the books.
7. Share records and the minute book: shareholders, dividends declared and any audit-waiver consent.

If these are not ready, finish them first with the year-end close checklist and, for a shareholder loan account with no schedule, the shareholder loan account guide. Tell the accountant the date the recipient needs the statements, so the work is scheduled backward from it.

Example

Illustrative figures in Canadian dollars.

A covenant asks for "annual financial statements" and names no level

A corporation has a $750,000 term loan. The covenant (a promise to give the bank reports and meet tests) requires "annual financial statements", and the accountant offers a compilation. Before paying for anything, the owner emails the bank: which report levels are accepted, how long after year-end the statements are due, and whether a cash flow statement is required. If the bank accepts a compilation, the engagement terms name the bank as a recipient. If the bank wants a review, the owner learns that before the compilation is ordered.

A franchisee told "reviewed statements within 120 days"

A franchisee with a December 31 year-end is told the franchisor wants reviewed statements within 120 days, which is about the end of April. A compilation would not meet "reviewed" as written. The review needs reconciled books and year-end adjustments first, so the owner starts reconciling in January and tells the accountant the date.

A franchisor with net worth of $3,000,000 selling an Ontario franchise

A franchisor with net worth of $3,000,000 must put audited statements or statements prepared to review standards in its disclosure document, unless an exemption applies. The net worth test needs $5,000,000, or $1,000,000 if a corporation that controls the franchisor has net worth of $5,000,000. At $3,000,000, only the lower figure could be met: the franchisor's own net worth must come from its most recent audited or reviewed statements, and the controlling corporation must show $5,000,000 on the same basis. The franchisee count, years in business and judgment criteria must also be met.

Different for you?

• Your agreement says "reviewed" or "audited", the reporting date is close, and you are unsure whether a compilation counts: get the lender's or franchisor's written answer on accepted report levels, then check who can issue the report and whether your books are ready with corporate tax and year-end help.
• You are an Ontario franchisor and a disclosure document is due: the statements must be audited or prepared to review standards unless an exemption applies, so check the exemption and whether your books are ready with corporate tax and year-end help.
• The books are not reconciled or years are behind: fix that first. See catching up on overdue books and bookkeeping help.
• Your corporation is outside Ontario, or provincially incorporated elsewhere: confirm the licensing rule and the corporate statute with your accountant and the provincial CPA body.
• You only need to understand a compilation: see the compilation engagement report and compilation engagement cost.
• You want the T2 fee or quote: see T2 cost and quotes.
• You found an error in statements already issued: see correcting last year's financial statements.
• You need income proof for a mortgage: see proving income to a lender.
• An investor wants financials before a raise: see tax clean-up before a Canadian startup raises.