Tech and life science companies face numerous operational and financial pressures, from nurturing innovation, and attracting investors and key talent, to planning for a successful exit and more — all while they grow the business. So why would a start-up company with so many irons in the fire choose to conduct a financial statement audit before it’s even required?
While it may seem like an additional task to add to your list, there are many long-term benefits to completing a financial statement audit before your investors or creditors require it.
There are numerous ways a financial statement audit can help your company — from the immediate outcome of the audit report and financial statements prepared under the required accounting basis, typically Generally Accepted Accounting Principles (GAAP), to other tangible by-products of the audit that will save your team considerable time and effort when executing your strategic plan. Below are the top four to consider.
What does your company’s five-year plan look like? Is there a capital infusion to support scalable growth? Will the strategic plan require a line of credit to stretch the capabilities of working capital? There is no doubt about the value of your company, but how do you best convey it to potential stakeholders?
Data is the clearest communicator of value. This is where audited financial statements, and all the effort behind them, come into play. The information provided in your audited financial statements will provide a clear picture for future investors and current stakeholders. The audit will also show you are a step ahead of peers and that investors can expect fewer surprises once they commit to funding. As a start-up company, short-term cash savings may seem like the better operational decision, but it could end up costing you when it’s time to determine your company’s sale price.
While each company uses different operational metrics, GAAP is the universal language used to evaluate financial results. The first and foremost benefit of an audit is comfort that you now have GAAP-basis financial statements, including disclosures, to present to potential stakeholders. To arrive at these audited financial statements, you will be required to present underlying account schedules and reconciliations, some of which you may not currently maintain.
In the technology and life science spaces in particular, companies are typically valued on revenue, with added emphasis on recurring revenue. Ensuring your company is compliant with revenue recognition under ASC 606 — the standard that provides a universal framework under which companies report revenue from customer contracts — offers investors the confidence they need to make educated decisions surrounding your company’s value. This is an area start-up companies cannot afford to miss out on.
In addition to revenue recognition, there are other important GAAP considerations to evaluate:
During an audit, your auditor will work with management to ensure the proper supporting schedules are prepared for these complex matters. This could include recommendations to use various software platforms to track revenue recognition, equity activity and employee expenses. This means one fewer thing your company needs to implement when meeting with stakeholders.
Auditors do not merely compile schedules into financial statements. They also gain a comprehensive understanding of your company’s policies and procedures and help you communicate that to stakeholders. Often, auditors will assist in drafting formal memos for management to approve and share with stakeholders along with the financial statements. Since auditors understand what matters most to stakeholders assessing a company, they can help create a full financial picture to help you tell your story.
Additionally, when a start-up engages an auditor before a sale is on the table, companies have the opportunity to understand any areas more susceptible to risks, such as misappropriation of assets or fraud, and to implement auditor recommendations to strengthen the company’s internal control system. A well-designed and implemented internal control system further boosts investor confidence and drives value.
The audit process will help your management team become more comfortable with third parties requesting information and fielding inquiries about everything from operations to capitalization policies. This preparation can help tremendously when finance and accounting teams are placed in the spotlight during due diligence and the first 100 days after an investment activity.
When it comes to growth, a company with better data and organization is likely to receive more favorable terms, whether related to the purchase price or lending terms, and an audit can help your company get there.
Discuss conducting a financial statement audit with your executive team as well as your financial and accounting advisers:
Requesting an audit of your financial statements can have impactful benefits for both internal and external parties. Potential stakeholders will be able to trust and use your GAAP audited financial statements to help determine the financial stability of operations. Internal procedures will be examined, documented and perhaps prescribed better practices by auditors. The finance and accounting teams will also learn the methodology of handling third-party requests and an introduction to presenting internal operations to external parties.
Contact Valerie Steppel or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.