Financial Audits and Your Small Business
Help your small business secure credit and a stronger financial future.
Businesses can receive tremendous benefits from better understanding their financial position. From improved interest rates and access to capital to protection from risk and even legal liabilities, financial audits can highlight areas of success or concern in a business and help the management team find greater pathways to future success.
“Companies with audited financial statements have interest rates that are nearly three-quarters of a percent lower than companies that do not,” says Michael Minnis, assistant professor of accounting at University of Chicago Booth School of Business in the Journal of Accounting Research. But having an audit performed can be an expensive endeavor. Running from $5,000 to $20,000 for small businesses and up to $75,000 for mid-market sized companies, the process is often cost prohibitive for many companies. In some cases a less intensive financial ‘review’ may be sufficient and provide the necessary data and security that many lenders are seeking – for about half the cost.
According to the Federal Reserve Board’s National Survey of Small Business Finances there are less than “one quarter of businesses with fewer than 500 employees who keep financial statements of any kind.” You don’t need to be sitting across from an IRS agent to need a financial audit. Having a certified public accountant review your business’ financials can illuminate areas of your business where you can make improvements and further strengthen products, services, and business processes for greater profitability.
Benefits of a financial review or audit:
· Lower interest rates on business loans
· Better rate of securing financing
· Identifying business weaknesses to avoid future IRS audits or tax penalties
· Preparation for business growth
A financial review can also provide the business owner(s) with greater familiarity with how the business operates, uses cash and assumes risk. Check with your bank or lender to see if audited financials are required or necessary – then follow up with a question about whom he or she would recommend to perform the audit. There legal and specific standards that the auditor will need to meet depending on your business' size, sales volume and IPO intentions.
Types of Small Business Audits
Business audits and their associated costs can be as varied as the businesses themselves. Fees can range from $5,000 to $75,000 depending on the business size, number of business units and other factors related to the complexity of the business.
Full Statutory Audit – Must be performed by a licensed certified public accountant. The full statutory audit provides a thorough verification of the business’ financial information and ensures that the business is fully compliant with all of the requirements of governing bodies including federal, state and local agencies.
Attestation – This process provides verification of your business’ financial data, but is not as detailed as the full statutory audit.
Non statutory audit or financial statement review – Unlike the above audits which are highly financially driven, these audits can include any department or any process within your business. If you are a business working in the healthcare industry, a non statutory audit can cover areas of legal or procedural exposure involving compliance with healthcare laws such as HIPPA. These cross-discipline audits can provide assurances that you’re doing everything right in your business or open management’s eyes to areas where the business could be exposed for potential liability risks.
After the review process has been completed, the auditor, usually a certified public accountant, will provide a final opinion which can arrive in several forms:
· Unqualified opinion – The ultimate reward of an audit, the Unqualified Opinion is the result of the auditor reporting that all materials necessary to complete the audit were made available and found to meet Generally Accepted Accounting Principles (GAAP).
· Qualified opinion – Still acceptable, the Qualified Opinion means that the auditor found a majority of the company’s materials to be acceptable with GAAP with a few exceptions regarding a specific account, area, transaction or process. The business is usually given feedback on how to correct these areas.
· Adverse opinion – The business is found to not be conforming to GAAP because the financial statements do not accurately reflect the status of the business in regard to the company’s financial position, operational structure or cash flow.
· Disclaimer of opinion – Due to a lack of sufficient information, evidence or proper documentation, the auditor cannot express an opinion on the business’ financials.
An objective financial review or an audit can be a significant learning experience for the business owner or management team. Your financial team, including a certified public accountant, bookkeeper, and tax professional can help you to take the information obtained during the process and utilize it to help strengthen and grow the business.
PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations. To find a trusted accountant in your area, visit www.SmallBizAccountants.com.
Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.
Copyright Information 2011 Professional Association of Small Business Accountants