If the word "audit" triggers only one image -- pain and suffering at the hands of the tax man -- it's time for a lesson in accounting jargon. That's because the term may also refer to a full-scale financial report prepared by your outside accounting firm: the kind of costly and comprehensive report that might very well be unnecessary for your company.
Use this quick primer to revisit your financial-reporting options:
Compilations. "These are fairly small jobs in which an accounting firm basically lists your financial results without expressing any opinion about their fairness or accuracy," explains Carol Riehl, assistant regional director of accounting and auditing in the Chicago office of Grant Thornton. The big advantage is cost: a compilation might not cost a start-up or growing company much more than $1,000. The disadvantage is credibility: lenders and others are skeptical about compilations because accountants don't verify the accuracy of their clients' financial statements.
Unless you're about to seek a bank loan or investment capital, you can probably rely on compilations, supplemented by an occasional review. (A compilation may even work if you're looking for a loan that's small or well collateralized.)
Reviews. One notch up from compilations in terms of accounting rigor, "financial reviews include inquiries of company management about trends and results as well as an analytic review of your numbers -- but include no actual testing of the information," says Riehl. Although this is still a "no-opinion" report, bankers prefer it because accountants have analyzed some of the information. Expect to pay two to three times as much as for a compilation, perhaps $3,000 to $5,000 for a growing company. When to use it? If you've got a good credit history and you're applying for a small- to medium-size loan or commercial mortgage.
Audits. These are the ultimate in financial reports, in which your accounting firm dots every i -- and makes certain to charge you for it. During audits, accountants must follow required procedures to obtain enough evidence to document the fairness and gauge the accuracy of your financial reports. That generally includes confirming accounts receivable and physically observing and test-pricing inventory. Audits are costly: perhaps $5,000 to $10,000 for a growing company, or two to three times the cost of a review. But they are essential for stock offerings, private placements, and most commercial loans.
A word of advice: don't bog your company down with more financial reports than it needs. If you don't need financing yet, Riehl suggests, "you may just want to occasionally bring in a qualified outsider to review your financial operations and make certain you're following acceptable procedures." An outside board member or retired industry executive could do the job nicely.* * *