There are a number of benefits that can be gained from obtaining an audit of financial statements even if there is no third-party requirement. Good auditors will familiarize themselves with the business and operations of a company and share valuable advice that may lead to more cost-effective ways to operate.
By leveraging the knowledge gained through the auditing process, an auditor may also make suggestions to management on ways to improve internal controls to ensure accurate reporting and guard against fraudulent activities.
“If an auditor discovers fraudulent activities with respect to financial reporting, these would be reported to management,” points out Rachel Simon, executive vice president of Gumbiner Savett Inc.
Smart Business spoke with Simon about audited financial statements, how to go about finding an auditor that recognizes your needs and the importance of starting the process early in the year.
Why is it so important for businesses to have audited financial statements?
Audited financial statements are needed by businesses for a number of reasons. They are required by various federal and state regulators, such as the Securities and Exchange Commission (SEC) for companies whose stock is publicly traded, the Department of Housing and Urban Development (HUD) for certain real estate developers and the National Association of Securities Dealers (NASD) for futures brokers.
Audited financial statements may also be required by lending sources, such as banks, current investors or potential investors. Sometimes, a company’s owner may request a financial statement audit so that he/she may obtain comfort about the financial reporting or to put employees on guard.
How should a company go about finding an auditor that recognizes its needs?
Various factors should be considered when a company’s management or audit committee (for publicly traded entities) decides to find a new auditor. Management should begin by trying to get references from its bankers, lawyers or management of other companies. Having an accountant that specializes in the company’s industry or type of regulatory reporting is an important factor. Some examples of industries that require specialized accounting knowledge are not-for-profit, real estate, banks, investment companies, broker-dealers and entertainment.
The ‘right fit’ as to the size of the accounting firm should also be considered. A company that is working with an accounting firm that is too big may not get the attention it deserves. On the other hand, a company that is working with an accounting firm that is too small may not get the appropriate level of expertise that is required.
Lastly, management should make sure that the accountant that has been selected to do the audit is in good standing with its state board of accountancy and the American Institute of Certified Public Accountants.
How should a business prepare for an audit of its financial statements?
The person(s) who will be responsible for providing the auditors with financial information should meet during the year with the auditors who will be in charge of the audit so that they can learn about the business that is about to be audited and to discuss what will be needed to perform the audit. The auditors will usually provide a list of the items needed. This first meeting should happen as early in the year as possible, since the auditors may perform some interim test work prior to the entity’s year-end.
Many times, auditors obtain and document an understanding of the company’s business and internal controls prior to their year-end fieldwork. In order to have as effective and efficient of an audit as possible, information to be provided for the audit should be completed accurately and completely prior to the start of fieldwork.
How can business owners benefit from a financial statement audit?
In addition to providing the auditor’s report, there are many other benefits that can be derived from a financial statement audit. Because an auditor is required to obtain an understanding of the company’s business and internal controls, an auditor may become aware of and recommend ways that the entity can improve its internal controls over financial reporting or profitability. The auditor is also required to perform certain procedures regarding a company’s policies and procedures to detect and prevent fraud. Any suggestions of ways to improve the detection and prevention of fraud would be recommended. Finally, an auditor may discover tax savings measures while performing the audit.
RACHEL SIMON is executive vice president of Gumbiner Savett Inc. Reach her at email@example.com or (310) 828-9798.