Sean Brady, CPA shares some key benchmarks that may indicate it’s time for an audit:
“The times, they are a-changin’,” is not just a title of a well-known Bob Dylan song. It’s commonly indicative of why your organization may need an audit.
Audits are typically brought about by change, primarily a change in the stakeholders. To clarify, we are not talking about the “dreaded” IRS audit. Instead, we are talking about a financial statement audit, the type of audit that is performed by CPAs. This is the type of audit that allows you to understand your business, provide assurance that your financial statements are materially correct, and allows your stakeholders to sleep easy at night. In this post we are going to explore the changes that can cause this type of audit to be necessary.
To begin, a stakeholder is anyone who can be affected by the actions, objectives, and policies of an organization. Most commonly in a small- or medium-sized business, the typical stakeholders are the owners and the employees of the company. In the day-to-day these stakeholders have some sort of understanding of what is going on. But what happens when that close circle begins to expand to include other stakeholders who may not be as connected to the daily operations, such as creditors, suppliers, unions, governments or potential investors? These new stakeholders need a reliable way to understand the operations and financial performance of the company so they can make their decisions. A way to gain this understanding is to read the audited financial statements.
An audit provides the highest level of assurance to stakeholders, both inside and outside the company. It requires that an independent CPA verifies that the numbers and disclosures presented in the financial statements are presented fairly in all material respects.
Here are some examples of “changin’ times” that may require a small- or medium-sized business to have an audit:
- New loans or financing arrangements: It is not uncommon that banks include covenants in loan agreements that require an audit to be performed on an annual basis and delivered within a specified timeframe after year end. Be sure to talk with your CPA when you are seeking new financing from banks.
- Funds received as a federal contractor: Often, the federal government will require audited financial statements when a company is engaged to perform work under a federal contract. It is important to review those contracts with your CPA when preparing to take on such work.
- Federal or local government financing of not for profit organizations: Under the Uniform Guidance requirements (formally known as A-133,) not-for-profit organizations are required to have a financial statement audit when they expend $750,000 or more of federal funds in an annual period. There are also numerous other federal, state and local funding situations that commonly require audits for not-for-profit organizations. Make sure you discuss the various funding sources with your CPA.
- Prospective buyer or new shareholders/members: Whether you are talking about bringing on new partners or looking to sell your business entirely, the prospective new party will probably want to see multiple years of audited financial statements to provide comfort that they are getting what they are paying for. If you have considered such a situation, it is important to talk well in advance with your CPA about audited financial statements and a company valuation, also.
This list is not exhaustive. Audited financial statements can be necessary for a multitude of other reasons. Sometimes a significant vendor may request them before providing your company credit. Other times, a customer may request them so they know that your company can reliably provide what they need. Audited financial statements are also commonly relied on in joint venture situations.
The bottom line is, when you notice the times are a-changin’, it is important to talk with your CPA. Contact your CPA at Corrigan Krause for assistance exploring your situation.