Once upon a time, financial statement audits were a significant requirement within the lending process. Thanks to the thorough audit process and resulting third-party validation of a borrower’s financial information, banks and credit unions were able to depend on the audited results to determine the creditworthiness and reliability of a company seeking a loan.
Today, in the face of increased lending competition, many banks and credit unions have reduced loan requirements to include reviewed or compiled financials statements, rather than a financial statement audit. A financial statement review or compilation is not as expansive in scope or as detailed in execution as an audit, which provides less comfort in the accuracy of the numbers underpinning a company’s loan application.
For banks and credit unions aiming to remain competitive without sacrificing collateral security, there is a middle ground – the field exam. Companies seeking loans will also reap benefits from hiring a trusted independent auditor like RKL to go beyond reviewed or compiled financial statements with a field exam.
How field exams differ from audits, compilations and reviews
Consider a scale of material correctness from one to 10, with one being no validation at all and 10 being fully accurate. A financial statement audit is pretty close to a solid 10, giving the banks, credit unions and companies a high level of confidence in the accuracy and validity of the underlying financial data. This confidence takes time, however, with auditors devoting many hours to the typical financial statement audit.
A financial statement review may rank at a three and a compilation perhaps a level one. Often times, companies are unaware of these lower comfort levels since their bank or credit union permits them to submit a review or compilation for their loan application. While a review or compilation generates a similar deliverable, they barely scratch the surface compared to a full audit. Whereas an audit scrutinizes all material numbers, reviews and compilations are not bound by the same validation requirements and instead rely upon information provided by the company, primarily corroborated by inquiry of management.
Field exam benefits for banks and credit unions
Field exams are an additional option for banks and credit unions to support lending decisions and are designed to perform targeted procedures to directly validate collateral or other lender determined areas of focus, such as ensuring that taxes are current to avoid liens against collateral. They can be used to compliment review and compilation financial statements or as an alternative method to support the lending decision. When coupled with a review or compilation, the field exam can provide a bank or credit union with more confidence to make their lending decision at a total cost that will be typically lower than a financial statement audit.
Beyond maintaining borrowing cost as a competitive advantage, there may also be regulatory benefits for banks or credit unions that require a field exam. During routine examinations, regulators want to see how loans are secured. They will likely have a favorable reaction to institutions that can strengthen collateral security with a field exam that independently examines its borrowers and their underlying collateral.
Field exam benefits for loan seekers
Since they are typically conducted in less time, field exams potentially provide a more cost-effective option than a review or compilation, and a more detailed understanding of the specific collateral. Field exams are a way for companies to derive more specific information related to their loan collateral with a lower time commitment.
Does your company intend to secure its line of credit with client receivables? Hiring a firm like RKL to conduct a field exam of that specific segment will give your company a detailed and more targeted look at the age of those receivables, existences of the receivables, and the collectability of those receivables. This allows your company to present a bank or credit union with the field exam report that gives a seal of confident approval around the intended collateral.
RKL field exams: Confidence for banks, credit unions and borrowers
RKL has a deep bench of financial services industry experts and financial consultants who are experienced in conducting field exams and understand how to create a better deliverable for banks or credit unions and borrowers. Contact me today to explore how your bank, credit union or company can enhance its lending or borrowing prospects with the confidence and security of a field exam.