When investing in a fund or syndication, understanding financial statements is key to evaluating the credibility and accuracy of reported financials. These statements provide insight into a company’s financial health and transparency. I find that very often investors are not aware of the nuances across the various financial statement types and thought it would be important to spend some time to clarify those.
Below are the four types of financial statements you may encounter, ranked from the most basic to the most rigorous:
1. Company-Prepared Financials
These are internally generated by the owner or accounting team. In small businesses, they may even be self-prepared. They typically include:
- Balance Sheet – shows assets, liabilities, and equity
- Income Statement – outlines revenue and expenses
- Statement of Cash Flows – tracks cash movement
While useful, these financials lack third-party validation, so investors should review them carefully for accuracy and completeness. Supporting information such as the general ledger, bank statements, receivable and payables aging, the rent roll provided within the reporting package provides additional comfort.
Most syndications start with this type of financial statement.
2. CPA-Compiled Financials
A step up, CPA-compiled financials involve a Certified Public Accountant (CPA) taking internal records and organizing them into formal financial statements. However, the CPA does not review or verify the accuracy of the numbers—they simply compile the information.
This level is common for businesses not yet ready for a full review or audit, but looking to improve credibility with external investors.
Some syndications and most funds (at least until they reach a certain scale) provide this type of financial statement.
3. CPA-Reviewed Financials
At this stage, a CPA does not just compile the financials but reviews them for accuracy and consistency. They conduct:
- Basic checks and validations to ensure statements are reasonable
- Limited assurance that no material misstatements exist
- Higher credibility than compiled financials
Investors can have more confidence in CPA-reviewed financials, but they still don’t provide the highest level of assurance.
Most larger funds or fund managers with multiple funds provide these types of financials, especially if requested by investors.
4. CPA-Audited Financials (The Gold Standard)
A CPA-audited financial statement is the most rigorous and trusted level. Here is why:
- Thorough validation – The CPA performs extensive checks and balances
- Formal opinion issued – Either “qualified” (issues found) or “unqualified” (clean)
- Often legally required – Many large funds and institutions must provide audited financials
For larger or more established investment funds, CPA-audited statements are a must. If you are investing in a new or smaller fund, you will likely encounter company-prepared or CPA-compiled statements, but as the fund grows, expect them to move toward CPA-reviewed or CPA-audited financials.
Why This Matters for Investors
When evaluating an investment opportunity:
- Start by asking for financials – Know which type the fund provides
- Understand the level of verification – Compiled vs. reviewed vs. audited makes a difference
- Prioritize transparency – The more rigorous the financials, the lower the risk of hidden issues
- Be aware that the cost of such financials is paid for by the fund, i.e. distributions generated by the various syndications the fund is invested in are used to cover the cost of such financials (among other operating expenses).
Now that you understand the nuances across the various financials, you will be better equipped to make a decision on which type serves you best while balancing the cost of the fund/syndication having to produce one.
Vessi Kapoulian
Peeling back the layers of passive real estate investing, so you protect the downside and invest with clarity and confidence.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.
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