Typically, nonpublic companies obtain
an audit of their financial statements
only if it is required by a third party, such as their financial institution, other
lender or investor. However, there are a
number of reasons why obtaining audits
can be beneficial even if there is no third-party requirement.
One example, says Don Carobine, CPA
and vice president of Gumbiner Savett Inc.,
is when a growing company requires outside funding in order to finance future
plans and goals. “Having audited financial
statements at least one year prior to this
need will ease the process when negotiating with financial institutions, other
lenders or investors,” he explains.
Smart Business spoke with Carobine
about the advantages of regularly conducting audits, how often they should be
obtained and the new audit standards.
What advantages can a nonpublic company
gain by regularly having audits?
A company may have future plans to go
public or be acquired by or merge with a
public company, which will require the
audit of three years’ balance sheets and
two years’ income statements. Having regular audits beginning at least two years
prior to the year a company plans to go
public will ease the process and ensure the
company is ready. The decision to obtain
audits may also go hand in hand with the
owner’s individual life plans. That is, after
working hard to build a valuable business
throughout his or her career, an owner may
want to slow down and enjoy a certain
quality of life. Having several years of
audits in place will ease the sale process
when the time comes and help ensure a
top-dollar sale price.
Another reason owners may want to
obtain audits is to provide them with a
level of comfort that the internal accounting records are accurate. Finally, a good
auditor will learn about the business and
operations of the company and provide
valuable advice to the owners that may
include more efficient and cost-effective
ways to operate, ways to improve upon
internal controls to ensure accurate reporting, and ways to minimize taxes through
keeping up with ever-changing tax laws.
How often should audits be conducted?
Audits are typically conducted on an
annual basis at the end of a company’s fiscal year. There are situations where an
audit may be helpful at an interim period,
such as when a company is sold, but such
a scenario would be dictated by circumstances. A company may want to consider
having a review performed during interim
periods, such as quarterly or semiannually,
if it would be beneficial. A review is smaller in scope than an audit and includes
inquiries and analytical procedures.
Does a company’s size or rate of growth
affect how audits should be conducted?
Yes. Auditors consider many factors
when determining how they will conduct
an audit, including the company’s size and
rate of growth. The first phase of an audit
is planning. The auditor learns as much as
possible about the business, operations,
internal controls, current year developments, risk areas and possible areas of
fraud concern, among many other things.
Obtaining this knowledge helps in the
determination of how the audit will be conducted.
How important a role do audits play in identifying and reducing risk?
Audits are performed on historical information. That is, they are performed after
the fact. Although auditors may identify
areas of risk during the course of an audit
and provide recommendations for reducing such, a company should not rely on the
audit process for identifying and reducing risk. Instead, company management
should develop a customized system of
internal controls over financial reporting
that is appropriately designed and that
takes into consideration risks that have
been identified by management. These
internal controls should be monitored periodically through compliance testing to
ensure their design is effective and that
they are operating as intended. In addition,
the internal control structure should be
revised when changes occur at the company, such as the addition or deletion of personnel, a change in accounting software or
the addition of a new line of business.
Are there any new audit standards of which
companies should be aware?
There are eight new statements on auditing standards that were issued by the
American Institute of Certified Public
Accountants last year that are effective for
the upcoming audit season. They are
referred to as the risk assessment auditing
standards and require that, among other
things, the auditor obtain a more in-depth
understanding of a company’s internal controls and that the controls be tested by the
auditor before arriving at conclusions as to
the design and effectiveness of a company’s internal controls during the audit. This
will require that companies provide their
auditors with more in-depth documentation of their internal control system than
they may have in the past. Management
should begin discussions with the company’s auditors now to learn what will be
expected of them in relation to these new
standards for their next audit.
DON CAROBINE is a CPA and vice president of Gumbiner Savett
Inc. Reach him at [email protected] or (310) 828-9798.