The Dreaded First Audit (See the Checklist to Prepare)
As the owner of a business, there's a chance that one day you'll need to go through the process of having your company audited. And while the idea of an audit may seem a bit intimidating (especially if you've never been through one before), the findings of an audit can help you improve your company's financial processes and reporting in a number of ways. The main purpose of an audit is to thoroughly examine an organization's financial reporting to ensure fair and accurate representation of the underlying business as defined by the standards of Generally Accepted Accounting Principles (GAAP).
We brought back Brian Minkel, CPA, who has spent nearly a decade in the industry working with companies of all sizes and across multiple industries. Brian started off in public accounting and eventually found his way to Nomad Financial to lead the Accounting Group as Managing Director. Given that Brian has been through dozens of audits, sitting on both sides of the engagement, he was the perfect person to chat with regarding that first audit. Here are our takeaways from that conversation.
When is an Audit Necessary?
There are many situations that may call for an audit of a company's finances and books. Usually, audits are triggered at the request of board members, investors, or lenders to ensure that certain covenants are met. Specifically, potential investors of a company may request an audit so they can enjoy the peace of mind in knowing that all the financial information they're receiving has been gone through with scrutiny. This also reassures them that they can rely on the accuracy and reliability of the information being presented to them. If you are unsure if it’s required of you, start with your capital raises- have you gone to institutional investors like venture capital firms or taken on non-credit card debt? If yes to either, check your financing agreements as it’s highly likely you’re required to do an audit/
For publicly traded companies, there is no choice when it comes to the audit decision. Regulation requires all publicly traded companies to have audited financial statements that meet the standards of GAAP.
What Auditors Decide: Potential Conclusions From an Audit
There are essentially four outcomes that can occur as a result of an audit. The specific outcome for any given company will vary depending on the findings from each part of the audit process.
The best-case scenario for any audit would be an unqualified opinion; this is the outcome that every founder and business owner wants. Essentially, it means that the organization has received a clean report and that there were not material issues noted throughout the process that need to be addressed.
The next-best finding would be a qualified opinion, which essentially means that the report is pretty clean, but there were some potential issues noted (although not likely to be anything major). Often times, a qualified opinion will occur when there are some items that auditors or management weren't able to come to a full agreement on. This can also happen if there are different transactions or approaches that fall outside the scope of general accounting limitations, but not enough so to trigger a worse outcome.
Disclaimer of Opinion
A disclaimer opinion actually means that the auditor was not able to reach a decision based on the information provided, so they disclaim on the opinion altogether. While this type of result doesn't necessarily mean that a company's finances are not in order, it also means that the professional isn't able to say with certainty that they are in order, so this is not a favorable outcome.
The worst outcome for an audit would be an adverse opinion which means that there were some significant material issues that could not be resolved upon the issuance of the report. This is an outcome that no company wants to face. At worst, it means there could be fraud, and at best it’s an indication that the company is so mismanaged that an auditor cannot determine the accuracy of the financial statements
Preparing for the Audit Process
If you anticipate the need for an audit at your company in the near future, of course you want the process to go as smoothly as possible. Fortunately, there are some specific steps you can begin taking now to make the process easier for all involved.
1. Let Your Team Know as Soon as Possible
For starters, be sure to let everybody within your organization know as far in advance as possible that the audit will be taking place. Ideally, this should be done at least two to three months in advance, as this will give your reporting team adequate time to get everything in place to go through the audit. Preparation is key to a successful audit.
2. Document Everything & Have It Ready
Make sure you're able to have all documentation readily available. This should include everything from your basic profit and loss and balance sheet statements to checklists, process documentation, and detailed lists of which employees are responsible for what. Auditors will be requesting access to all the documents relevant to the financial reporting process and internal controls.
3. Make Sure You Have the Right Resources
Finally, ensure you have the right resources available to help support the audit. If you don't have the resources you need in-house, consider hiring a third-party to help you prepare for your first audit. When hiring a third-party for this purpose, it's important to find a company that knows your industry well and has specific experience in navigating audits for other businesses within your industry. This will give you the greatest peace of mind that your audit will run as smooth as possible.
Preparing for an audit is something that many founders will need to do at some point within the first few years of running a company. And by knowing ahead of time how to prepare and what to expect, the entire process can go as smoothly as possible for all involved.