Why is it hard to plan for and get an audit?

I am often surprised how often lenders and investors ask entrepreneurial firms for an annual audit and firms agree to the requirement without much understanding of what they are getting into.

The first step in responding to an audit requirement is to select auditors. Audit firms range from very small one man CPA firms to major Big 4 firms such as PricewaterhouseCoopers or KPMG. It makes sense to interview several firms, but not before learning from your lender or investor what kind of audit opinion they are seeking. Once you have selected an audit partner, this firm will be with you for many years and you need to have a good understanding of their audit techniques and how much you will be billed. It is pretty painful to change firms, so picking the right one for you the first time makes sense.

In general, if your business is small and will remain so, then a local firm makes sense. If you expect to be acquired or do an IPO, then a firm that handles acquisitions and public companies will be important. The Big 4 firms are most capable of handling the really major issues of revenue recognition and growth and should be considered strongly for firms planning this type of exit.

Most audits will deliver GAAP financial statements but getting your statements to conform to GAAP is a non trivial task. Most accountants cannot provide true GAAP statements due to the very technical requirements. As an example, valuation of stock options and income tax provisions are areas where many firms need help. You will need to work with you selected audit firm to prepare your books for audit which includes having documentation for your accounting transactions and making your records fully available. Having an experienced accountant on your staff to manage the audit will be key.

Often lenders and investors will require an audit by a certain date. Make sure that the firm can meet the date, often 90 days following year end. Large firms that handle public companies may have difficulty with this requirement and want to deliver your opinion in the second quarter.

Finally, make sure your staff can handle the field work. Typically the auditors will come to your office and work for a week or more going over your records. Make sure there is room for them to work and employees that can answer their questions. Try to prepare schedules they ask for prior to the start of the field work to make the work go smoothly.