There's a reason why acquirers demand three years of audited financials from acquirees, as William Webster of American Star Software Inc. discovered recently. Eight months ago, he was negotiating to merge his company with another software manufacturer, which was in the midst of its first complete audit. Just to be safe, Webster sent his own team of auditors in to observe. "You'd think that a year of audited financials, checked out by our own accountants, would be enough," he says. "The audit certainly didn't turn up any great cause of concern."
That's because a single audit couldn't catch something like slow-moving inventory. "We later found out that the company had hundreds of thousands of dollars of inventory that simply wasn't sellable, and would have to be written off," says Webster. Fortunately, he discovered the problem in time to cancel the merger. The next time, he says, he'll demand a full three years of audited financials. "If the same dusty boxes show up for three years running, the auditors start to think, 'Maybe it's time to write those things off."