Is This Your Situation: Your Private Company May Need an Audit
As a general rule, private companies should consider an audit when financial statements need to be verified. You want capital providers to receive complete, accurate and timely financial information that has been subjected to an appropriate level of scrutiny.
Audits can be the difference between closing a deal or not. Suppose your company is about to be bought — it will need to show audited financials to close the deal.
Or suppose your company is on a fast-growth track — not only the size, but the structure of your company is rapidly changing. You are suddenly faced with unfamiliar challenges as well as opportunities: new business and new tax issues. These new wrinkles may make you reach out for an audit.
Private companies may be subject to generally accepted accounting principles to satisfy lenders or insurance companies. Such changes may mean you need to report employee stock options, but being a private company, you don’t have a market price for your stock. You may need valuation experts who use complex pricing models to come up with a fair-market price.
While some aspects of audits may not be needed early in a company’s life, you can begin to lay the foundation for long-term fiscal responsibility. Putting the appropriate pieces and people in place to monitor, track and perform an internal audit is a wise way to conduct your business for whatever the future holds.
Some may wonder why a private company would put forth the time, effort and financial resources necessary to be audited. The real question is — why wouldn’t it? The benefits of an independent audit far outweigh the costs. An audit helps meet your fiduciary duty to provide objective oversight and monitoring.
You may be saying to yourself, “But my business is too small for an audit!” But don’t you want to cover financial reporting, operational efficiency, and compliance with laws and regulations? Good analytical tools, risk assessment methodologies, training and planning are outgrowths of a good internal audit function.
When it comes to cost, managers may ask themselves what function an audit would fulfill and how much it will cost. Consider that audits cost far less than the fraud investigations that might result from ill-managed or poorly monitored internal controls.
You may worry that getting ready for an audit will take time away from daily business operations, but you should realize that the creation of extensive new documentation probably won’t be necessary — you are already reporting on key metrics, corporate performance and financial results.
It’s true that private companies face fewer disclosure requirements — and don’t fall under the scrutiny of the Securities and Exchange Commission. Accounting regulators like the Financial Accounting Standards Board weigh the need for increased disclosure against the burdens that small-business owners would face under stricter reporting rules.
Consider this: When the right questions are not asked, important red flags are not raised and power goes unchecked, and fraud may rear its ugly head. Strong governance is a shield against fraud. You’ll save your private company from headaches down the road.
Do you need an audit? Give us a call, and we’ll explain the details of an audit and help you take the next steps.