Most companies will, at some point, need to go through an audit. This may be driven by merger with or acquisition by a larger or public company, a company going public itself, or just with capital infusion from an institutional investor who requires audited financials. Audits may sound painful, and they can be, but they offer substantial value to companies and their leadership.
So, what is an audit?
Companies are audited to gain a third party, external opinion to determine if their financial statements are sufficiently accurate as to represent fairly the financial status of the company. Acquisition and investment transactions depend upon a high level of reliability to determine financial health and profitability that drive valuation and the investors’ assessment of risk versus return.
Why would I want one?
While audits can be seen just as an unfortunate inevitability of success, they are extremely valuable for companies. Audits confirm whether the processes used by your company are generating accurate and reliable information and offer another perspective from someone with varied experience on your accounts and numbers. Audits give you best practice input from experienced professionals which is valuable knowledge for company executives.
Audit reports give detailed feedback on the rigor and reliability of a company’s internal processes, with each finding individually identified and described. Executives can then implement improvements that specifically target the deficiencies and provide a subsequent report to the auditor listing the steps taken as part of their overall strategic planning.
When should I conduct an audit?
Most often companies are audited as a result of new investors or acquirers. That being said, there are a few questions to keep in mind before your company chooses to conduct an audit. Once you’ve had one audit, you should continue to be audited each year. Not re-auditing for a few years raises more questions than it answers: What caused the company to not audit again? What from the first audit could they not resolve? Has investor and executive interest dropped off since the first audit?
Smaller companies interested in an audit for their own purposes should carefully consider the benefits. Audits can be expensive; and committing to an annual audit expenditure in the budget, and consequently the allocation of internal resources to support this, can be a significant overhead.
How should I find an auditor?
The first step to finding an auditor is obtaining referrals. Go to your banking, accounting, and tax partners who have dealt with these situations frequently before and ask for suggestions based on their knowledge of the company. Second, you must build a set of criteria against which to compare the candidate auditors. The degree to which the different criteria affect executives’ decisions will depend on the nature of the company. These criteria should include aspects such as the auditor’s experience in the specific sector, the strength of your referral, the prominence of the audit firm (companies often seek Big 4, but that may not be the right approach for your company), the depth of resources available to the audit firm, the firm’s local/regional presence, and the estimated cost.
Is there anything else I should know?
Yes. When most early-stage venture-backed companies are audited, the scope of what is examined includes everything from the opening balance sheet – day 1 of the company – until the present. You must do two things: do not underestimate the size of the first audit and be sure to follow good accounting practices from the beginning to minimize the size and cost of the first audit.