If you're buying a company or contemplating a merger, demand at least three years ofaudited financials. Why? Because an audit of a single year won't catch critical trends, such as slow-moving inventory.
William Webster learned that the hard way. Many years ago, he was negotiating to merge his software company with another software business, which wasin the middle of its first complete audit. Webster sent his own team of auditors in to observe the checkup, which he thought would be enough. "The auditcertainly didn't turn up any great cause for concern," says Webster.
But it didn't show the whole picture. "We later found out that the company had hundreds of thousands of dollars of inventory that simplywasn't salable and would have to be written off," says Webster. Fortunately, he discovered the problem in time to cancel the merger. Three years ofinformation, he thinks, would have helped to identify earlier the material that was mistakenly adding to the value of the company.