How Startups Can Prepare for a First Time Audit
Building something is exciting. The feeling of seeing an idea blossom into an enterprise is what entrepreneurs and innovators live for. Watching as people buy into what you are doing, as they commit capital and allow you to scale in new ways, is invigorating.
Eventually this can turn into something larger, something that is ready to be bought by someone else or hit the open market for an initial public offering (IPO). Or, you could also be looking for new investment or larger private capital commitments. Any of these scenarios typically require a financial statement audit.
The term audit can be one that founders shudder at because they know it could require some financial tidying up for the process to begin. This is especially true of founders who do not have a finance or accounting background. The necessary steps can seem daunting as you prepare for the first time your business goes under a microscope.
Auditors, with good intention, are asking questions and digging deep into the financial records of your business to find the answers that are required for the audit. Once complete, their report can determine your path ahead and the options available. This report holds a lot of power in your ability to raise additional capital or debt and continue to grow your company.
How do you set yourself up for success? There are several steps that you can take before embarking on a financial statement audit.
1. Communicate with staff and employees effectively
When conducting or embarking on a financial statement audit, as a key stakeholder it is important that you emphasize to your employees the need for honesty and transparency throughout the process. It can help if your employees understand and are aware of why the audit is occurring, but if that is not possible, it is important to stress the need for clear communication with the firm that is conducting the audit.
2. Have audit requests prepared
It is important to know the current framework and processes of your financial and technology controls. Aside from an upcoming audit, it is good practice to maintain proper records in case this information is needed quickly. For an audit, organized information allows the auditor to review it efficiently. We recommend that clients have the following information prepared and accessible when embarking on an initial audit:
- Cash accounts
- Inventory
- Fixed assets
- Accounts payable
- Liabilities/obligations
- Revenue recognition process
- IT controls processes
- Monthly or year-end processes and controls
- Accounting for contingencies
- Accounting lease agreements
3. Gather data and information including lease agreements, contracts, etc.
The more efficient the audit process is, the great experience an initial audit can be for all parties involved. Before the audit occurs, it is always a good practice to gather important documents like lease agreements, contracts and financial statements so they are available if requested. If these are not easily accessible or if their whereabouts are unknown, it can cause delays in the audit process and increase time required for the team to issue their report. Be sure to have these documents ready for the auditors.
4. Reconcile all balance sheet accounts
Reconciliations help ensure that all transactions have been properly accounted for. The reconciliation can also help identify entries that need to be corrected before your auditor starts their fieldwork.
5. Select an auditor that makes sense for your business and knows your industry
There are a lot of auditors to choose from varying in size, experience, industry knowledge and location of practice. These are all important factors to use when determining who you will choose to conduct the audit.
Questions to ask as you evaluate your options:
- Is the auditor a subject matter expert in your industry?
- Are they familiar with the type of operating structure that you employ (e.g. partnership, corporation, 501(c)(3), etc.)?
- Do they have similar clients to you?
- Does the engagement team remain up to date with new audit, accounting and reporting requirements specific to you and your business?
- Is the firm responsive to requests?
- Do their fees make sense for the time commitment required?
- Do they employ secure document management software?
Undergoing a first-time audit can be daunting, but if you prepare using these steps and recommendations, it will make the process smoother so can focus on building and investing in the business. Know that a first-time audit typically takes the longest, and can be quite stressful, but subsequent audits should be easier. With a successful first-time audit behind you, you may be able to raise new capital, engage in a transaction, or even to pursue an IPO.
