Top 5 Reasons Your Business Should Get a Financial Audit
There are many reasons why your company should look into getting a financial audit completed. As a business owner, it’s vital that you conduct audits to determine whether your business is operating at peak efficiency. You can limit these audits to examinations of your financial health, or you can also order an extensive audit that takes a deep dive into all the risks and challenges facing your business and how you can prepare for those risks in the future.
1. Business Worth is $15M+
As your business grows, it becomes more and more important that your company completes a financial audit. Not every business needs a financial audit. It depends on a few factors: the size of your company, the type of company, and the eventual goals and objectives for the company’s future. For example, a company worth $2 million in revenue, with 5 employees, has no plans of selling, and is not growing substantially will really have no need to get an audit completed.
But, if a $2 million company that is growing and is backed by investors or plans on having some debt, then it is worth getting a financial audit complete. You will also have to have an audit completed if the company ever goes public.
Any company worth between $15 million and $200 million should get a financial audit completed. This is a large amount of money that your company is handling, and although an audit is not designed to eliminate all the risks, catch all errors, or provide any guarantees, it can provide peace of mind that your accounting records correctly represent the financial condition of the company based on GAAP. Some companies must be pushed to get an audit, as they may not see the benefits immediately, but they will always thank themselves in the long run when the company expands.
2. Planned Growth
It is important that if your company is planning for growth that your financials are of very high quality so that you can use them as a tool to properly run your business. Not only that, but you are adding value to your company by having an audit completed. Users of your financial statements will also have a positive sense of quality as it relates to the numbers you are presenting to potential investors. At the very minimum, an audit can uncover weaknesses in the financial systems or sometimes the staff undertaking them, and lead to recommendations for further training or improvement to help better the company for the future.
Based on data from more than 10,000 closely held companies—about half of which have less than 500 employees—a study by the University of Chicago Booth School of Business found audited businesses save an average of $6,900 for every $1 million in outstanding debt every year as a result of lower interest rates, which were more than half a percentage point below rates paid by non-audited businesses. For a loan of $3.3 million, the average size of loans analyzed in the study, the savings was about $23,000. These savings will help to allocate that money to different places to help the company grow in other areas.
3. M&A and IPO
If you ever plan on going through a M&A or IPO, then you will be required to audit your financial statements. In addition, from a valuation perspective, an audit adds value to your company because you have audited financial statements. If you ever plan to exit, then buyers of your company will look at you as the better company compared to companies with no financial audit.
Public companies are subject to an annual external audit. Once complete, the results of the audit must be submitted to the U.S. Securities and Exchange Commission. The passage of the Sarbanes-Oxley Act of 2002 expanded public company reporting requirements. It requires company management to include a report on the effectiveness of the company’s internal controls and requires external auditors to validate the truthfulness of the report.
4. Capital Raising
Lenders may require audit results when any company applies for financing. An audit will show investors that you are a solid investment. It allows the investors to identify and fix any weaknesses and address those beforehand, giving them full transparency. An audit also could help in terms of negotiating just how much financing you’d be able to receive. Audit results may also be a prerequisite for bidding on a contract or presenting a grant proposal.
Auditing regulations vary by state. For non-profits, audits are most often required if they receive a certain level of state government funding or when a nonprofit register with the state for solicitation or fundraising purposes.
5. Credibility and Recognition
Financial audits, whether required by law or not, can be important for enhancing the public credibility of any sized company. Not only does an audit serve as a check on a company’s financial status, but regular annual audits can help the public track a company’s success and corporate responsibility approach. An audit can help build public confidence in the company. It can also provide the public with the information necessary to identify cases where companies are operating at less than full transparency. A financial audit ultimately will increase a company’s value and identify areas of improvement.
Third parties, such as banks, investors, private equity groups, insurance companies, and valuation specialists, will look at your company as one that is enhanced and one that cares about quality and is a “better company” because you have audited financials.
Not only does an external audit serve as a check on a company’s financial status, but regular annual audits can help the public track a company’s success and corporate responsibility approach. An external audit can in this way help build public confidence in the company. It can also provide the public with the information necessary to identify cases where companies are operating at less than full transparency.
The Audit Services industry is expected to continue to experience steady demand over the five years as overall business activity improves. As the economy recovers from COVID-19 (coronavirus) and states resume operations, there will be an increase in corporate activity, such as mergers and acquisitions (M&As) and initial public offerings (IPOs), which will spur growth for industry services. NOW CFO consultants provide years of audit prep expertise preparing companies for audits. We offer consultants with experience as auditors that will complete the auditor’s checklist. The checklist often appears as a foreign language to CFOs and Controllers. Audits typically are time consuming and expensive. NOW CFO is here to ease that burden and act as your intermediary, communicating with auditors on an ongoing basis and providing regular status updates.
THE TOP 5 REASONS
YOUR BUSINESS SHOULD GET A FINANCIAL AUDIT