Not all financial statements are the same evidence.

Why this matters

Most owner-operators don’t think about evidence grade until a buyer or lender asks. By then the answer is whatever the existing CPA relationship has produced — typically reviewed financials, occasionally management-prepared, rarely audited at sub-$50M revenue. The evidence grade caps the buyer universe, the lender universe, and the multiple. Knowing where your financials sit on the ladder is the first structural question before going to market or pursuing institutional capital.

The four grades below come from the AICPA’s Statement on Standards for Accounting and Review Services (SSARS) and the AICPA’s Auditing Standards Board, the bodies that govern what a CPA can attest to and at what evidence threshold. The structural distinctions are not Capital Refinery’s opinion — they are the operating definitions every institutional reviewer applies.

The four evidence grades

1. Management-prepared (no CPA attestation)

The lowest evidence grade. Financial statements are prepared by the operator, the bookkeeper, or the in-house accountant — without a licensed CPA attesting to anything. The numbers may be perfectly accurate; the buyer or lender has no third-party assurance that they are.

• →What it tests: nothing — the CPA is not engaged
• →What it assumes: the operator's representations are accurate
• →What it costs: zero CPA fees
• →What it caps: the buyer / lender universe shrinks materially; many institutional acquirers and most credit committees require minimum reviewed-grade financials before advancing past initial diligence

2. Compilation (SSARS engagement, lowest CPA grade)

A licensed CPA assembles the operator’s data into financial statement format. The CPA does not verify, does not test, does not opine on accuracy. The report explicitly states no assurance is provided. The artifact looks like a financial statement but the CPA’s name on it adds presentation discipline only — not evidence.

• →What it tests: nothing — the CPA explicitly disclaims any verification or opinion
• →What it assumes: management's data is what management says it is
• →What it costs: typically low single-digit thousands per engagement
• →What it caps: similar to management-prepared for institutional buyer / lender purposes; the CPA's involvement is presentation, not assurance

3. Review (SSARS engagement, mid-grade)

The CPA performs limited analytical procedures and inquiries — looking for items that appear unusual or inconsistent with the operator’s overall business. The CPA does not perform substantive testing of underlying transactions or independent confirmation. The report provides “limited assurance” that the financials require no material modifications to conform with the applicable framework (typically GAAP).

• →What it tests: surface-level reasonableness via analytical procedures and management inquiries; substantive testing is NOT performed
• →What it assumes: management's underlying records are reliable; the CPA's work is at the analytical layer, not the transactional layer
• →What it costs: typically low-to-mid five figures per annual engagement, depending on complexity
• →What it caps: acceptable evidence grade for many middle-market buyers and most non-bank lenders, but typically caps the EV/EBITDA multiple meaningfully below the audited-financials premium; institutional acquirers often require an upgrade to audit as a closing condition

4. Audit (Auditing Standards engagement, top grade)

The CPA performs substantive testing of underlying transactions, independent confirmations (bank balances, accounts receivable, accounts payable), inventory observation procedures, internal control assessment, and risk-based testing of material accounts. The report provides “reasonable assurance” that the financials are free of material misstatement.

• →What it tests: substantive evidence at the transactional and account-balance level; independent confirmation of key balances; internal control posture
• →What it assumes: nothing beyond what the auditor can substantively verify
• →What it costs: typically mid-to-high five figures or low six figures for middle-market businesses; audit complexity scales with revenue, location count, and inventory / receivables complexity
• →What it earns: institutional-grade evidence credibility; the buyer's IC can rely on audited numbers without rebuilding verification; the lender's credit committee accepts audited financials at face value; the LP's review team treats the artifact as evidence rather than attestation

How each grade reads by counterparty

Buy-side investment committee

The buyer’s IC typically commissions a Quality of Earnings (QoE) report regardless of the seller’s evidence grade. But the QoE’s starting point — what it has to verify versus what it can accept — depends on the seller’s grade. Audited financials accelerate QoE (the substantive testing has been done); reviewed financials extend QoE (substantive verification is part of the buyer’s diligence); management-prepared financials make QoE a substantive rebuild from raw data. Each grade up shifts QoE cost and timeline measurably.

Senior bank credit officer

Senior bank credit committees typically require reviewed or audited financials for facilities above modest size. The transition from reviewed to audited is often the gate between “commercial bank financeable” and “institutional financing financeable.” The cost-of-capital gap between bank and institutional financing can be substantial; the evidence-grade gap that gates it is often a single CPA-engagement upgrade.

Direct lender / BDC / private credit

Direct lenders are more flexible on grade than bank credit but more stringent on evidence reconciliation. A direct lender will often accept reviewed-grade financials but require third-party QoE during underwriting. The total evidence work is similar to audit, just structured around the deal rather than as an annual engagement.

LP (fund-level review)

For fund-level financials (not portfolio company financials), the ILPA Principles establish institutional LP expectations for audited financials and quarterly investor reporting. The expectation is audited; deviation invites institutional review questions about GP governance.

Board director (portfolio company oversight)

Board directors increasingly require minimum reviewed-grade financials as a baseline for oversight discharge. The duty of oversight under Delaware corporate law (Caremark and successors) is harder to defend if the board is relying on management-prepared financials without independent verification. Not legal advice — but the structural pattern matters.

When audit isn’t worth the cost

Upgrading from reviewed to audited financials is not always the right move. The full audit cost (typically high five figures or more) is a real expense; the audit work consumes management time; the audit timeline extends close cycles. The decision to upgrade depends on the structural question: what does the upgrade unlock?

• →If the business is preparing for sale or refinancing within 18-24 months and a higher buyer / lender universe materially improves the outcome — upgrade
• →If the business is in growth mode and needs to maintain optionality across multiple institutional capital paths — upgrade
• →If the business has stable financing, no near-term transaction, and no institutional capital plan — the upgrade cost may not earn return; reviewed-grade with strong reconciliation discipline may be the right grade
• →If the business has weak reconciliation discipline regardless of grade — fix the reconciliation discipline first; an audit on poorly reconciled records is an expensive way to surface what the operator should have known anyway

How the IRA’s evidence ladder parallels this

Capital Refinery’s operator ladder is structurally parallel to the AICPA evidence grades — different domain (institutional readiness rather than financial statement attestation), same architectural principle: price reflects evidence cost, not feature differences. The grades stack the same way:

• →Self-Assessed (CR ladder) ≈ management-prepared (AICPA ladder) — operator-attested, no third-party verification, lowest evidence cost, lowest counterparty credibility
• →Verification In Progress (CR Gap Review) ≈ compilation/review (AICPA ladder) — limited third-party verification, mid evidence cost, mid counterparty credibility
• →Evidence-Confirmed (CR IRA) ≈ audit (AICPA ladder) — full third-party verification, externally distributable at the operator's election, highest evidence cost, highest counterparty credibility across the entire institutional universe

What to do with this

• →Identify where your current financials sit on the AICPA ladder. If you don't know, your CPA does. Ask.
• →Identify where your institutional readiness sits on the Capital Refinery ladder. The $750 Self-Assessment grades the structural readiness analog of management-prepared financials.
• →Decide whether the gap between current state and target state earns the upgrade cost. Upgrade is justified if the institutional capital universe you're unlocking earns the spend.
• →Sequence the upgrades. Financial statement upgrade typically precedes institutional readiness upgrade — buyers and lenders read the financials first.
• →Do not run the AICPA upgrade on weak underlying reconciliation. The audit on poorly reconciled records surfaces the gaps at audit cost rather than at internal-fix cost. Reconciliation discipline first, then grade upgrade.

Sources cited

• →AICPA Statements on Standards for Accounting and Review Services (SSARS) — current authoritative literature on compilation and review engagements → https://www.aicpa-cima.com
• →AICPA Auditing Standards Board — current authoritative literature on audit engagements
• →PCAOB Auditing Standards — public-company audit reference (relevant for IPO-track or post-IPO businesses); private companies typically follow AICPA standards → https://pcaobus.org
• →ILPA Principles — Institutional Limited Partners Association governance and reporting standards for GP-LP relationships → https://ilpa.org/principles/
• →AICPA SSAE 18 (and successors) — Statement on Standards for Attestation Engagements; the conceptual framework behind QoE engagement standards
• →Delaware corporate law: In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) — board oversight standard referenced in the board-director section above (not legal advice)