There are four kinds of financial statements. 1) Internally prepared 2) CPA compilation, 3) Reviewed, and 4) Audited. Each type is considered by the accounting industry as being more reliable than the one below. As you get higher on the list, the cost of each goes up.
Audited financial statements carry the highest level of reliability according to the accounting industry. They are also the most expensive. Many business owners wonder when they should spend the time and expense for audited set of financials.
Audited financial statements are very stringent examinations of your company, its financial processes. When an auditor gives an unqualified opinion as to the financial health of your company it has many implications.
With the costs of having audited financial statements ranging from $20,000 to $50,000 annually depending on the complexity of your company, it’s a serious commitment.
If your company has many shareholders, getting audited financial statements is potentially worthwhile. The higher the number of shareholders a company has the greater the chance that one of them may bring litigation as a result of business practices. Audited financial statements may help reduce the cost of litigation and may even prevent it.
Any company planning on having an initial public offering is required to have three years of audited financial statements before they are permitted to sell stock.
If you believe you may sell your company in the next 3-5 years, having audited financial statements for the two or three years prior to the sale may actually help increase the price of the sale because the potential buyer has very strong financial statements to evaluate. This is a risk/return analysis because if your company is very small you won’t realize the benefits that you will when you are larger.
Certain types of government contractors are required to provide audited financial statements. If you participate in the SBA 8a program and get to a certain size, the SBA may require you to upgrade your financial statements to either “reviewed” or audited.
When your company reaches a certain size (either in number of employees or sales) it may be desirable to get audited financial statements because audits can detect employee fraud. On a national basis employee fraud represents approximately 6% of company gross sales.
Banks and other lenders may require your company to provide audited financial statements as a condition of a large loan.
Your CPA can help you decide what type of financial statements should be used for your company, but keep in mind that sometimes spending the money for an audit can result in a saving you money due to theft and if you are planning to sell your business may help make the sale smoother with a higher sales price.
EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.