Undergoing a business audit is a lot like visiting the dentist. It might be unpleasant—painful, even—but it’s necessary for maintaining good (organizational) health. It’s one of the best ways to effectively find and address emerging issues before they become deep-seated, costly problems later on.
Imagine getting expert perspective and deep insight into your company—what’s going right, what needs improvement, and where opportunities exist, along with what steps you should take next. Total clarity. That’s the power of an audit. Indeed, it might be among the most valuable decision-making tools a leader could ask for.
How can an audit benefit your business? I’m guessing you’re here for an answer to that question. Maybe your company is about to undergo an audit because you just secured an investment, for instance, or reached another major milestone. Or perhaps you’re considering the potential advantages you stand to gain from proactively conducting one. Whatever the case, here’s what you should know about the benefits of business audits.
What Is an Audit?
An audit is an inspection of an organization’s accounts. Audits help companies and their stakeholders accurately and objectively measure financial performance and determine the accuracy of their records.
For many business owners, the word “audit” is synonymous with an obligatory (and unwelcome) inspection by a state or federal public authority—for example, an IRS audit. However, many audits don’t involve government agencies or agents. Such audits are usually paid for the business in question and conducted by a third party firm or another private, independent entity acting externally to the business.
Audits vary in terms of scope, timeline, and level of detail, but they typically involve (at least somewhat) thorough scrutiny into an organization’s books, taxes, financial statements, and other key accounting-related documents.
Why Would a Business Leader Want an Audit?
It’s not necessarily a question of what you want. Most companies will, at some point, need to go through an audit. Business milestones—such as a merger, acquisition, or decision to go public—often trigger audits. Sometimes, an institutional investor will demand an audit before infusing capital into the business.
While audits can be seen as an unfortunate inevitability of success, there are plenty of reasons for companies to look forward to audits. Some leaders will even subject their companies to audits apropos of simply seeking better visibility into the organization.
An audit confirms whether your accounts are in good shape and your company’s practices and processes are generating accurate and reliable information. Harnessing perspective from an experienced professional, an audit supplies you with best practice input and other kinds of valuable 360-degree knowledge executives so often lack.
Audit reports give detailed feedback on the rigor and reliability of a company’s internal processes, with each finding individually identified and described. Executives can then implement improvements that specifically target existing deficiencies. Subsequent follow-up reports and exchanges with the auditor ensure continual improvement.
Should You Consider Conducting an Audit?
It might be a good time to consider conducting an audit of your business if…
Your company is actively courting investors. Many investors will want to see detailed, accurate, independently corroborated financial statements so they can confidently back your business.
You’re about to sell your company or enter into a merger. Audits are key elements of due diligence during M&A and other kinds of business transactions.
You’re considering an IPO. An audit will allow you to demonstrate to shareholders and regulatory authorities that your company has managed its financials properly and is ready to go public.
You’ve conducted an audit in the past. Once it’s undergone one audit, your company should continue to be audited each year. Failing to do so raises troubling questions for stakeholders:
- “What caused the company to not audit again?”
- “What from the first audit could they not resolve?”
- “Has investor and executive interest dropped off since the first audit?”
If these considerations look familiar, you might be recognizing them as a few of the signs it’s time to switch to Generally Accepted Accounting Principles (GAAP). Like GAAP accounting, an audit demonstrates the business is well-prepared and putting its best foot forward with investors.
That said, as with switching to GAAP, auditing isn’t the best idea for every business in every situation. Sometimes, the cost and stress of an audit just aren’t worth it.
Smaller companies interested in an audit for their own purposes should carefully consider the benefits. Audits can be expensive. Committing to an annual audit expenditure in the budget—and consequently, the allocation of internal resources to support it—can be a significant overhead. In this case, a better solution for your business could be analyzing your current financial reporting and refining it to get more accurate information.
Companies with disorganized or missing records should also be careful before walking into audits. When most early-stage venture-backed organizations get audited, the scope of the examination includes everything from the opening balance sheet—day 1 of the company—until the present. Don’t underestimate the size of the first audit, and be sure to follow good accounting practices from the beginning to minimize the size and cost of an inspection in your future.
Looking for an auditor? Your tax and accounting partner can help. Here at tempCFO, we can leverage our network to find the right audit solution for you. We’ll also work alongside your company to develop an audit strategy and a set of criteria for comparing different options. Ask us about business audits.