What Level of Financial Statements Does Your Dealership Need?

As year-end approaches, it is a good time for your organization to consider what type of CPA prepared financial statement it is required to have completed. Depending upon your organization’s internal and external requirements and future strategies, a financial statement could be necessary.

What are the Different Types of Financial Statement Engagements?

The three primary types of financial statement engagements are compilations, reviews, and audits. Compilations rely on the data provided by the client and provide no assurance that the financial statements are free of material misstatement nor do they assure the statements conform to U.S. Generally Accepted Accounting Principles (GAAP). Reviewed financial statements provide limited assurance that the statements are free from material misstatement and conform to GAAP. During reviews, analytical procedures are applied to identify unusual items and trends in the financial statements and then inquiries are made regarding these items. The third type, audits, provide a reasonable level of assurance that a client’s financial statements are free from material misstatement and conform to GAAP. Audited financial statements are the only type of report to include an opinion about whether the financial statements are fairly presented in all material respects and conform to GAAP.

What are the Internal and External Requirements for Financial Statements?

Owners, management or other stakeholders may want audited financial statements to mitigate the risk that fraud is occurring within their organization. One important note is that an audit is not designed to uncover fraud, but it can play a role in deterring employees from committing fraud and can strengthen an organization’s internal controls. Auditors typically provide a management letter at the end of an audit with suggestions to help improve operations and accounting processes.

The most common reason for preparing financial statements is that they are required by the dealership’s financial institution. An organization may be required to provide reviewed or audited financial statements as a part of the lending covenants established within debt agreements. The financial institution’s determination of acceptable level of risk will play a role in what level of financial statement is required by an external CPA.

Future Opportunities

In an era of consolidation in the industry it is important to determine what type of financial statement should be prepared for the future goals of your organization. Combined reviewed or audited financial statements will be important if your organization decides to sell your dealerships to private equity, pursue additional dealership acquisitions while securing additional financing, and potentially combining all your outstanding financing to a syndication.

Conclusion

Now is the time to be proactive in determining what level of financial statement your organization requires. If you have any questions, please contact one of our dealership-specific accountants for additional guidance on what level of professional service your organization needs.

Laurie Holt