When should a firm plan its first audit?

This is a great question and faced by many firms that wish to grow. Audits are expensive, so why would anyone want an audit when they are not required legally by any government agency.

To grow, a firm requires financing from investors, banks and others. Increasingly, such institutions want to be able to believe the financial statement supplied as well as to be sure of ongoing financial controls within a company. The audit is the means by which you can show financial responsibility to the folks looking at you from the outside.

If you require only small funding amounts, an audit may not be required, self made financial statements may be adequate. But in larger financing event, or for an acquisition, it is quite important to consider an audit. But be sure before agreeing to an audit that you realize the expense of an audit as well as the internal disruption and changes needed within your organization that may be necessary to pull it off. An audit can be quite disruptive to internal processes and require installing controls that did not exist before. In addition, your accounting department may not realize all the requirements of GAAP accounting, which is increasingly becoming a mystery to all of us.

Even if an audit is not needed for financing purposes, at some point you want either internal or external audits for control of your growth and to assure that you are able to manage your company and rely on the information your financial organization produces for decision support.

Choice of an audit firm is quite important. Be sure to pick one suited to your size and objectives. If an IPO is in your plans, consider one of the top five or six. If an acquisition is likely, consider a well regarded firm from medium size upward whose opinion will be respected. If for local borrowing, consider a firm suggested by your bank, which may be a well respected local firm. In all cases, the auditor is a professional that should not be subject to the "lowest bid." You will get what you pay for.