As a commercial lender, you may receive financial information from borrowers in literally all shapes and sizes. These range from audited financial statements, which provide the highest level of CPA assurance that the information is accurate, to compiled statements, which only reflect management’s representations of the business’ financial condition. In the middle are reviewed statements, which provide a limited degree of CPA assurance.

Reviewed and compiled financial statements generally don’t include another key element of audited statements: an audit committee letter. They may, however, include a management letter, which will indicate whether the CPA uncovered any issues or concerns in the financial statements.

These concerns will be classified as “controlled deficiencies” (the least severe and important), “significant deficiencies” (of moderate severity and importance) or “material weaknesses” (the most severe and important). Note that these concerns do not imply that the financial statements are inaccurate, but rather that the CPA uncovered specific deficiencies in the company’s internal controls.

An audit committee letter, meanwhile, will point out such things as whether:

  • Any new accounting treatments were used that could impact the statements (e.g., a switch from LIFO to FIFO accounting).
  • There were any disagreements between the CPA and management.
  • Management went to another CPA for an outside opinion.
  • The CPA made any material adjustments or corrections to the statements.
  • The CPA discovered immaterial adjustments he or she felt were too small to require an entry, but important enough to note separately in a letter.

If you’re not receiving management and/or audit letters with your borrowers’ financial statements, it’s incumbent on you to dig deeper into the statements to uncover important details about the borrower’s financial condition and/or internal controls of which you should be aware.

If you have further questions about management and audit committee letters, please give us a call.