When I tell people that I am an auditor, many times I think they get the wrong idea. No, I am not an IRS auditor that digs into your old tax returns in order to tell you how much in back taxes you owe because your charter fishing business that has not made any money for 10 years is really a hobby. No, I am not a DCAA auditor here to tell you that your accounting system is not “DCAA Compliant” or that your indirect rates 5 years ago were too high so you owe the government $100,000. I am a financial statement auditor and I am NOT your worst nightmare.
After I tell people that I perform financial statement audits, the question that typically comes up is, “Why would my business ever need a financial statement audit.” Here are a few examples of when a business may need to have an annual audit performed:
1. For-profit businesses looking to sell in the near term have an easier time defending their value when they can show a history of annual audited financial statements. The acquiring business may then rely on the historical financial statement numbers when they perform their due diligence process.
2. Many times a private equity company that has invested significant funds in a business will require that the business’s financial statements be audited every year.
3. If a loan is significant enough, some banks may require annual audit to be performed.
4. Many not-for-profit boards require their organization to have an annual audit.
As you probably know, there are different levels of audit and attest services that CPA’s provide. Click here to read a quick overview that may help you understand the differences between an Audit, Review and Compilation. The higher the level of service required, the more time the CPA needs to complete the engagement and therefore the more costly the engagement.
Many clients have called me stating that they need a financial statement audit. Almost always, my response is, “Why?” I have found that, in some cases, the client does not need the level of service they think they need or they may be able to negotiate to a lower (and less costly) level of service. If a creditor or investor says they want to see annual compiled financial statements, you might ask if copies of the income tax returns would be sufficient. Maybe a creditor is requesting reviewed financial statements. You may ask the creditor if you can provide compiled financial statements for the first year and reviewed financial statements for the ongoing years to help out with the initial cost. The bottom line is that you may have more flexibility in the decision than you think.
So the next time you see a financial statement auditor, no need to run for the hills! We are here to help you make the best decision based on your business’s immediate needs.