Audit Preparation Services May Be Your Businesses Secret Weapon: Here’s Why


Apr 21, 2022 | Audit Preparation

Say the word “audit” and what comes to mind? Many people think “IRS” and start to panic, but for businesses, an audit often focuses on the accuracy of its financial statements. Privately held companies undergo financial statement audits for various reasons. An audit can be voluntary, or it may be required by certain stakeholders. Whatever the situation, before opening the door to audit a company should follow the Boy Scout motto: Be Prepared.

We get many inquiries from business owners and CEOs about how to prepare for a financial statement audit. In this article, we address the questions we hear most often.

What is the first thing that comes to mind when people ask about audit preparation? 

The simple answer is:  Plan ahead. Start earlier than you think you need to. Qualified auditors who are available to do this work are in short supply, and audit firms are becoming more selective about the firms they are willing to take on as clients. If you need an audit within the next 90 days, you are probably out of luck–reputable audit firms are “sold out”.

Key Takeaways:
1. Audit preparation can help companies avoid potentially serious problems with investors.    2. Audit preparation services are worthwhile because financial audits are less costly (and less painful) when businesses are well-prepared.    3. An audit preparation firm will clean up issues in advance, instead of waiting for auditors to raise a red flag.

What are the main reasons private firms have their financial statements audited?

  1. To raise new capital or sell the business. An audit from a recognized accounting firm will make that process go much more smoothly.
  2. To meet requirements imposed by lenders and/or investors. Businesses often view this as the equivalent of going to the dentist – they may not want to do it, but it wards off a host of problems.
  3. To support supplier relationships. Audited financials can convince new suppliers to extend trade credit and may give current suppliers confidence to allow a company to place larger orders.
  4. For Employee Stock Ownership Plan valuations.  ESOPs may require audited financial statements, as the value of the options depends on a business valuation that relies on robust financial statement data.

What are some “gotchas”, or things companies fail to anticipate when preparing for an audit?

A lack of compliance with GAAP reporting often creates unpleasant surprises in a financial audit. GAAP requires things that are frankly irrelevant to cash flow and other key metrics; therefore, many private companies often safely ignore them. To prepare for an audit, a company will have to start paying attention to GAAP issues that may have seemed unimportant.

For example, a business with an automatic escalation clause in its office or warehouse lease may have to revise its accounting treatment of the lease. In another example, we worked with a company that used stock options as part of its employee compensation and had convertible debt in its capital structure. To help the company prepare for an audit meant we had to account for these instruments according to GAAP. 

[Related: Probing Your Business Financials: Does GAAP Even Matter?

Another common problem is a lack of internal controls. When reviewing a company’s internal controls, auditors will, among other things, look at the segregation of duties. A company may have been relying on a “streamlined” process that could potentially create problems if its employees are not always trustworthy. Although employees may not be engaged in wrongdoing, even the appearance that such a thing could occur is a problem.

If an audit uncovers deficiencies in internal controls or accounting processes and procedures, the result may be a Management Letter describing those deficiencies. A Management Letter which identifies significant deficiencies can provide a roadmap for the  CEO to address those issues and put better systems and controls in place prior to approaching new investors. 

What does an audit preparation service provider actually do? 

In a nutshell, an audit prep firm reviews policies and procedures and does a preliminary audit of the company’s financial statements. As noted earlier, for a business owner undergoing an audit can feel like going to the dentist.

Hiring a firm to prepare for the audit makes the process as close to painless as possible because the audit prep firm does the work–including dealing with the auditors once the audit is underway. Our first step is to make sure a company’s books are closed properly, in accordance with GAAP, and that supporting documents are in good shape.

That is no small task, and we dig into the details. We also research relevant GAAP and disclosure issues and show how they apply to a company’s particular situation.

What’s the worst that could happen if a business is not well prepared for an audit?

No exaggeration–it could be a disaster. If a company’s books and records are in disarray:

  1. The audit will cost much more than expected because the auditors will have to spend a lot of time digging through the disorganized books and records; or
  2. The audit firm could decide it is not feasible to proceed and could pull out of the engagement. The auditors will advise the company to hire an audit preparation service or hire better people in its internal accounting team and will reschedule the audit for a later time (which could cause a substantial delay); 
  3. Worst-case scenario – the company ignores the recommendation to hire an audit preparation firm and the audit does not proceed. In that case, the company is, in polite terms, “messed up.” It may end up out of compliance with a bank, and investors may lose confidence in the financial health of the business. Current investors may refuse to provide more funding, or the company may be unable to obtain the valuation it is seeking in selling the business. 

What should companies look for when hiring an audit preparation services provider? 

When we hear this question, we like to turn it around and explain what companies should expect from bringing in an audit prep services team. Undergoing a financial audit can feel intrusive – it can feel like inviting someone into your house to open up all of your drawers, cabinets, and closets to ask questions about what you own.

A good audit prep firm will get into the weeds to get a business ready for that – even calling customers who have not paid their bills to find out why. Companies that had a less-than-positive experience with an audit in the past, where the auditor told them “you need to hire an audit prep firm,” should be upfront about those problems– we can help, but we need you to communicate openly. 

In choosing an audit preparation firm, experience matters. Familiarity with your industry is important, as is an understanding of how companies like yours are financed – venture-backed firms often have many different types of “exotic” financing, and an audit preparation services provider should be familiar with options, and warrants, convertible debt, and different sources of capital. It is helpful if the audit prep firm has experience with the type of audit firm you will be working with – interactions with the Big 4 can be different than working with local or regional auditors. And know that if fraud is uncovered, the audit prep firm will help you to inform the right people and deal with it.

Whether the audit date has been scheduled or not, get in touch with an audit preparation firm early in the process. A qualified firm will explain what to expect and may help you find an auditor if you need one (if you think finding a plumber to come to your house within a week is hard, try finding an auditor who can fit you into its schedule over the next three months).

Getting the right help from a good audit preparation services firm can completely change an audit from a painful process to one that ends with a grateful smile.  

Learn more: Audit Preparation Resources

Everything You Need to Know About Financial Statement Audits: Including why you should obtain an audit, financial statement audit alternatives, and more. 

Case Study: How Fixing Financial Records Leads to 300% Growth for one SaaS Company:  How one New-York based SaaS company went from messy books and an IRS fine to an acquisition with the help of G-Squared Partners. 

When Is the Right Time for Your Company to Get an Audit?: How soon should you think about an audit? Plus, what your company needs to do to be audit-ready.