My first financial audit was intimidating. My company, Student Advantage, was preparing for its IPO in 1999 and the audit firm, PriceWaterhouseCoopers, needed to audit all of the material entities that had merged with Student Advantage during the prior few years. My little start-up company, The Main Quad, had merged with Student Advantage in December 1997 and now the PWC auditors wanted to audit my homespun little Quickbooks accounting that I had done myself as a 20-something entrepreneur and no formal accounting training. I survived it, and the official audit of The Main Quad Inc. was in the Student Advantage IPO SEC filing with all $60,000 of revenue or whatever we had back in 1997. Audits come up anytime you are considering financing, funding, or selling your business.
Financial audits are on my mind every year at this time as many of my companies and my investment fund, Greybull Stewardship, have their annual audits. Audits are work and sometimes the detailed requests are annoying and time-consuming (and many people will say to not waste your time and money). Nonetheless, I am convinced of the helpfulness of them and recommend them to owners whose business gets to the size range where I invest — between $500,000 and $3,000,000 in net income. For start-ups, they probably aren’t worth the time until you have proven your product and your market and are starting to gain traction. For companies in between, a review may be a good option as they are less expensive and time-consuming but you get the benefit of an outsider helping you think about accurate financial records.
Financial audits (and other audits such as IT security, food safety, education accreditation, etc.) are helpful for these reasons:
- Signals professionalism. While accounting theory is not perfect, a bunch of people have spent time contemplating the best methods to accurately portray financial results. It signals professionalism when your company wants to do things accurately (using the best methods possible) and to a high standard.
- Improves processes. Having to produce documentation for revenue recognition or any other purpose helps a company understand what is needed for accuracy. Then, the company can adjust its internal processes over time to produce the proper documentation. This also helps management better know what is happening in the business more quickly.
- Identifies big, avoidable accuracy issues. Sometimes, there is a larger liability or revenue issue that should be recognized in a fundamentally different way. It is better to adjust when you are small. It is embarrassing to have a big fundamental issue pop-up during a financing, funding or business sale process that could have easily been identified years earlier.
- Establishes a (more) reliable record. A good track record is like gold, particularly one that is blessed by a third party. While the future always changes, a verifiable track record of the results of your business will pay-off big time in any financing, funding, or sales process.
- Outside look at your business (and your explaining everything) never hurts. It is always helpful to explain your business and get feedback, particularly on something as fundamental as financial processes, internal controls, and accurately assessing how the business is doing. Don’t expect any ground-shaking insights, but give-and-take with an intelligent person with experience, like most audit partners, is always helpful.
Even when I spend a weekend day handling audit requests like I did last weekend, I am convinced of the value of the audit process and recommend it to business owners, particularly if you are thinking of a financing, funding, or selling process in the coming several years.
- Bad Accounting is Bad Business and Bad for Your Personal Credibility [July 23, 2012 masonmyers.com]
- Mezzanine Financing – A Guide for Business Owners [June 22, 2012 masonmyers.com]
- To Sell Your Business or Not to Sell Your Business, That is the Question (a series) [April 22, 2012 masonmyers.com]
- Value of AUDIT (surenrajdotcom.wordpress.com)