Reliable financial reporting is crucial to any company’s success. Here’s why your business should consider investing in audited financial statements.
Understanding the Differences
Most businesses use an in-house accounting system to manage their financials. The documents prepared by your staff through this system are known as “internally prepared financial statements.”
While internal financials often suffice for the daily operations of a small business, they typically don’t adhere to all the reporting standards mandated by U.S. Generally Accepted Accounting Principles (GAAP).
When an external CPA audits your financial statements, they examine various accounting documents to ensure GAAP compliance and then offer an opinion on your statements. An “unqualified” opinion means the auditor agrees with your in-house team’s preparation methods. Conversely, a “qualified” opinion indicates that one or more GAAP reporting standards haven’t been followed, which doesn’t necessarily mean your financial statements are inaccurate—just that they don’t fully comply with GAAP.
The Stakeholders’ Perspective
Why is GAAP compliance important? Lenders, investors, and other external stakeholders care deeply about it. For instance, banks might require audited financial statements before approving loans, and sureties often demand them for bonding purposes. Additionally, some government agencies require audited statements for contract bids.
Audited financial statements can also lead to cost savings. Small businesses with audited statements often receive lower interest rates on loans compared to those without. Furthermore, the thoroughness of an external audit means these statements are less likely to contain errors, such as data entry mistakes. For example, an auditor will verify a $100,000 equipment purchase on your balance sheet by checking original receipts.
Considerations for Your Business
While audited financial statements offer significant benefits, they are not a decision to be made lightly. Besides the financial investment, an audit requires substantial time and effort from you and your employees, who will need to provide extensive documentation and participate in interviews.
Is an Audit Right for You?
If external stakeholders don’t require audited financial statements, there are other cost-effective options your CPA can offer, such as compiled or reviewed statements. These alternatives can still provide valuable insights into your company’s financial health.
Contact us to determine the best approach for your situation. If you opt for an external audit, we’ll discuss timelines and responsibilities before the fieldwork begins.
DISCLAIMER:
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation.
