Preparing for your first-time audit

The first-time audit: Signaling a new stage

For an emerging growth company (EGC), an independent financial statement audit may be the farthest thing from management’s mind. All eyes are on raising capital, generating revenue, and scaling the business.

Eventually, many companies will reach an inflection point when an audit is called for. Often that happens when they take on outside investment—be it a bank loan, venture capital equity, or some other private investment vehicle—and an audit is part of the terms. Other times, the inflection point happens when the company reaches “critical mass,” prompting founders and their advisers to think about laying the groundwork for the next stage of development—even a potential initial public offering or other exit strategy.

Either way, an accurate and transparent first-time audit of the company’s financial statements, representing the company’s official adoption of US generally accepted accounting principles (GAAP), is imperative. There are steps companies can take to help their first audit go as smoothly as possible.

Let the journey begin

An independent financial statement audit represents a significant advancement in the maturity level of an emerging growth company. At the same time, it also creates an expectation among the company’s senior management, advisers, lenders, and investors that the audit process will repeat year after year.

The upshot is that financial statement audits are seldom “one and done.” Instead, they are a commitment that requires an ongoing investment of time, resources, and labor. Through this investment, EGCs often experience improvements in many areas including record retention and segregation of responsibilities. By following these tips, growth companies may position themselves for a successful first audit and the ability to take on the demands of an effective ongoing audit process.