Common questions seem to exist among small to medium-sized businesses… “Why would my company need an audit? When is an audit of my company required? What the heck is an audit?”
As a CPA with over 20 years’ experience being an auditor, I know how we CPAs tend to overcomplicate things. The CPA-speak, if you will, can be confusing and may leave you wanting more. So, I’m going to bend your ear, or eyes for that matter, and attempt to simplify some of the basic questions of just what an audit is and the best time to engage an auditor for your business. Here goes…
What is an Audit?
First of all, I’d like to address what we mean when we use the word ‘audit’. This term is very specific, and the hopeful outcome is to issue an audited set of financial statements – the balance sheet, income statement and statement of cash flows as well as the related footnotes to the financial statements. When you engage a CPA to audit your company’s financial statements, that CPA and his/her team will take a deep dive into your company’s annual transactions and the year end balances to obtain supporting documentation and verify what you say happened…actually happened. An audit always looks backwards rather than focusing on future events & trends. It is intended to give the users of the financial statements assurance so that they can make financial or operational decisions about your business (i.e., invest in your business, extend a loan, rent out office space, offer special payment terms, etc.).
There are not varying types or levels of an audit. There are however varying levels of assurance that a CPA can provide on your company’s financial statements. An audit is the highest level of assurance and there are two “lower” levels of assurance that can be provided called a Review and a Compilation. I recently discussed these varying levels of assurance on the Maximizing Business Value Podcast, and you can check that out here.
When to Get an Audit
So now that we’ve discussed what an audit is and how it is used by a company’s stakeholders, let’s talk about when is the right time for you to engage an auditor. Now you may think as an auditor myself that I would tell you to get an audit right away. While I do think that an audit creates significant accountability and can dramatically enhance your financial culture, I don’t think every time is the right time for an audit. An audit can be costly and can drain the time of your most valuable resource - your people. However, if you are thinking your company needs a capital infusion (equity or debt) in the future or if the sale of your company is on the horizon, then I would say you’re ready for that audit and please do not delay.
First time audits can extend beyond the expected timeline and will take a significant amount of your team’s time. The last thing you want, or need is that investor, banker, or buyer wondering why the audit is being held up and the transaction closing date needs to be pushed out another week and another and another. My advice is to start the process early, perhaps 2-3 years before a possible transaction or needing that loan. Get your accounting team focused and the audit process streamlined before talking with future stakeholders. This will instill confidence and trust in your business and will most likely make the overall transaction process easier. Simplicity, I would argue, is something we all need more of these days.
There are many things you can do today to prepare for an eventual audit that may be years down the road. Invest in a CPA (internally or externally) now who knows how to build strong operational and internal financial controls. This will ensure your books and records are well-prepared for when that auditor comes knocking on the door…or in today’s world, show’s up in that Zoom meeting. Invest in a strong general ledger system or ERP system that can scale with your organization. Build accountability among your management team by analyzing monthly financial data and working through budget vs. actual variances with them.
Ultimately, I would encourage you to not fear the audit process. Partnering with a great auditor can truly help your business thrive. That partnership should open the door to deep insights about your business and can enable you to leverage capital markets needed to take your business to the next level. An audit can also bring you the peace of mind that your business is on the right track and that your financial house is in order. We all like to experience that “squared away” feeling and I encourage you to find an auditor, when the timing is right, who can get you there.
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ABOUT THE AUTHOR
Jeff Owens has more than 16 years of experience in public accounting. At Armanino, he focuses on serving the nonprofit and technology sectors, which helps clients keep up with the accounting and tax regulatory environment, maintain strong financial reporting processes and internal controls, and access the capital markets. He is a member of the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants. He received a bachelor’s degree and a master’s degree in accounting from Southern Methodist University.