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Preparing for your first-time audit
Startup audit considerations
Before pursuing an initial public offering (IPO) or other exit strategy, an early signal that a startup is approaching maturity is the need for a financial statement audit. Being prepared for your first-time audit is critical on your path to continued growth and may even boost investor confidence.
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- Signaling a new stage
- Seven steps to prepare for your audit
- Let the audit journey begin
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The first-time audit: Signaling a new stage
For an emerging growth company (EGC), an independent financial statement audit may be the furthest thing from management’s mind. All eyes are on raising capital, generating revenue, and getting the business to scale.
Eventually, however, many companies will reach an inflection point when an external 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 or even a potential initial public offering or other exit strategy.
Seven steps to prepare for your audit
Regardless of what initiated it, an effective and transparent audit of the company’s financial statements, which represents the company’s compliance with US generally accepted accounting principles (GAAP), is imperative. There are steps any startup can take to help their first audit go as smoothly as possible. Among them:
A first-time audit often reveals two types of deficiencies:
- Record retention. EGCs often lack all the records needed to fully support the transactions that underlie their financial statements.
- Segregation of responsibilities. In a growing company, it isn’t uncommon for one person to handle multiple accounting responsibilities, giving rise to a control deficiency from a financial reporting perspective.
In whiteboarding, the audit team and auditor dive into the financial accounting practices to:
- Gain understanding of company operations
- Identify and address potential differences between the company’s financial reporting practices and US GAAP requirements
- Understand the auditor’s approach and types of information likely to be requested
Let the audit journey begin
An independent financial statement audit represents a significant advancement in a startup’s maturity level. 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. By following the seven tips above, startups may position themselves for a successful first audit and the ability to take on the demands of an effective ongoing audit process.
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