s your company grows and matures, you’ll need to engage an accounting firm to provide some level of assurance on your financial statements. The level of assurance that should be performed depends not only on what you need, but also on what the other people who rely on your financial statements need.
First ask yourself who will be using your statements, and once you’ve considered your users’ needs, speak with your advisors to determine what level of service you require.
Here are 10 stages at which you may want to transition from a review to an audit.
— Your bank requires a switch. The amount and type of leverage is usually a key driver for the level of assurance that the bank will require. Changes in your business could also lead your bank to require a switch.
— Your shareholder group is growing. As the number of users of your financial statements increases, you may consider that the level of assurance should also increase. A higher level of assurance will give new shareholders a higher degree of comfort in the security of their investment.
— Your business is becoming more complex and the financial reporting is not as straightforward as it used to be. As your business evolves, so should your financial reporting.
— Your finance team may not be as strong as you may like and you require validation on their reporting. The work involved in an audit is more extensive, which will help validate your internal financial reporting and assist you in evaluating your finance team.
— You’ve undertaken a transaction. An audit is now required, as payments are being made based on your financial statements. An audit will provide additional assurance to both the vendor and the purchaser, when amounts are being calculated on underlying financial statements. The level of assurance will usually be outlined in the purchase and sale agreement.
— Your company is growing. Whether by volume or new geographic markets, growth could lead to more users of your financial statements, be they suppliers or customers. The enhanced level of assurance will not only give you a higher degree of comfort in your financial statements, but may also be required by additional users.
— You’re preparing for a sale transaction. From the seller’s perspective, changing from a review to an audit could identify potential issues that would come up in a sale transaction. An audit will allow you to address and correct them pro-actively. From a buyer’s perspective, the level of assurance on the financial statements could change the amount of due diligence required.
— You may be considering financing. Depending on the amount and type of financing you’re considering, the lender may require an audit instead of a review.
— You may be considering adding investors. A higher level of assurance will be a positive indicator for anyone considering investing in your business.
— You’re considering going public. An audit will be a requirement from the regulators as part of the IPO process, and then each year thereafter. Start planning early and reach out to your advisors to understand what you need to consider as you embark on this process.
Choosing an audit or a review is mainly a question of your needs and the needs of your creditors and investors. Proper planning and discussions with your advisory board, investors, creditors and a qualified accountant should yield the right decision for your company – one that will fulfill your needs in the most cost-effective manner.
Rachel Rodrigues is an EY Canada Partner, Private Client Services