Most small Ontario businesses hand a buyer statements an accountant compiled from what the owner reported, not statements a review or an audit engagement independently verified. Deciding whether that is good enough starts with knowing what the corporate law default actually is, which is not what most buyers assume.
Key takeaways
It is worth checking, rather than assuming, what a target’s corporate law actually requires before deciding whether its financial statements need more assurance. A treadstonelaw.ca answer on this exact question for Ontario private corporations is specific: audit exemption for a non-distributing OBCA corporation requires that “all of the shareholders entitled to vote consent to this in writing each year”, and absent that consent, “the corporation is not required to have its financial statements audited” only where the waiver exists — otherwise an audit is the statutory default. Even where shareholders waive the audit, “the corporation still needs to prepare financial statements, and those statements must be placed before the shareholders.” Checking the target’s corporate minute book for whether that annual waiver was actually filed, every year, is a concrete diligence item — a target that has been treating an audit as optional without ever formally waiving it has a governance gap worth flagging on its own.
A treadstonelaw.ca answer aimed directly at a buyer facing this question is a useful baseline: “compiled financial statements largely reflect what the owner reported rather than what an accountant independently verified.” Its advice is not to walk away, since the absence of assurance is common among small businesses and is not itself evidence of a problem — it is to compensate for it directly: “treat the absence of audited financials as a reason to look harder yourself, not as evidence the business is being misrepresented,” through stronger own-side diligence, “robust representations, warranties, and indemnities around financial accuracy,” and a real conditional diligence period. In its own words, the absence of third-party assurance “shifts more of the verification work onto your own accountant during due diligence.”
Canada does not publish a general rule tying assurance level to a private company’s revenue, but a genuinely comparable federal example exists, and it is worth knowing even though it governs a different kind of entity. Corporations Canada’s guidance for not-for-profit corporations under the Canada Not-for-profit Corporations Act sets out an explicit grid: a soliciting corporation with revenues “more than $50,000 and up to $250,000” must have its public accountant conduct an audit unless members pass a special resolution requiring a review instead, and above $250,000 “PA must conduct an audit”; non-soliciting corporations follow a parallel $1,000,000 line between review and audit. This is not a rule that binds a private target company — it governs not-for-profits, not OBCA private corporations — but it is the cleanest published example in Canada of the underlying logic a buyer should apply: the more revenue and the more capital riding on the number, the more assurance is worth requiring, on a graduated basis rather than an all-or-nothing one.
The decision connects directly to how the acquisition is being financed. As covered in what financial diligence should cost on a small deal, a lender relying on cash-flow-based underwriting leans much more heavily on independently tested earnings than one lending against identifiable collateral. The same logic applies to insisting on a review or audit engagement directly: it is worth the added time and cost where the deal is priced on a multiple of earnings that has not been independently tested, where related-party transactions or margin inconsistencies have already surfaced in diligence, or where the buyer’s own capital at risk is large relative to what a compiled statement can actually support.
A review or audit engagement on the historical statements answers a narrower question than a buyer needs answered — whether the statements are free of material misstatement, prepared consistently with the applicable framework. It does not, on its own, test whether related-party pricing is at market, whether the filed tax returns match the ledger, or whether a full year of bank deposits reconciles to reported revenue. Those remain the buyer’s own diligence items regardless of the assurance level on the underlying statements — see reconciling tax filings to the internal accounts and reviewing bank statements line by line. Requiring more assurance raises the floor under the numbers; it does not do the buyer’s own work for them.
Consider a target with $600,000 in annual revenue, compiled (not reviewed or audited) statements, and a corporate minute book that shows no audit-waiver resolution on file for the last three years — a scenario set out here to show the reasoning, not a specific target. Two separate findings sit inside that one fact pattern: a governance gap (the OBCA default was arguably not being followed correctly), and an assurance gap (the buyer has no independent verification of the numbers being paid for). Neither, on its own, should stop the deal. Together, they are a reasonable basis for requiring a review engagement before closing, or for pricing the risk into a larger holdback if the seller will not agree to one.
No — a valuation opinion answers what the business is worth given the numbers presented; it does not independently verify that the underlying financial statements are accurate. They are complementary, not substitutes for one another.
It is a negotiated cost like any other diligence item — either side can commission it, and a seller’s refusal to pay is not a reason for the buyer to skip it, only a reason to decide who bears the cost.
Yes, in principle — a purchase agreement can make a satisfactory review or audit outcome a closing condition, the same way it can condition closing on other diligence findings. Whether it is practical depends on timeline, since an audit takes materially longer to complete than a review.
A short call is enough to weigh the cost of a review or audit against what diligence has already found.
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