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Top 3 Reasons To Review/ Audit Your Annual Financial Statements

Top 3 Reasons To Review/ Audit Your Annual Financial Statements

September 07, 2021 | by By Robert McGee, Audit Partner at Cambaliza McGee LLP

1. Timely and Accurate Information.
Information is a powerful tool which can be used to drive the future success of the company. In saying this, the information must be both timely and accurate. If the information received to make decisions is accurate, but a year out, to what use is the information? Conversely, if the information is timely, but incorrect, a misstep is likely. Our firm works with a lot of small and medium sized companies and a common theme we find is that when management has no outside statutory requirements, the timely and accurate close of the books suffers in lieu of the day-to-day operations. We field calls all the time from companies looking for reviews or audits many months after the year-end because a requirement has suddenly come about. In many of these cases, the books are still not closed. Having an annual review or audit on the calendar each year sets a precedence for management to focus in on annual closings. It now becomes a bit of an annual report card for your accounting team. Management now knows that there is an expectation for timely annual information which hopefully results in timely monthly information throughout the year.

Our firm also works with management to ensure financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  We find that many small to medium sized companies prepare their financial statements on a cash basis. Firstly, this is not in compliance with GAAP and secondly it does not provide ownership with the complete picture of what took place during the year and how it may compare with previous years. Also, many industry standards and ratios are based on GAAP reporting, therefore when ownership is comparing the results of its company to the industry, the results may be deceptive. A review or audit will take a look at the accrual-based accounting as well as provide footnotes to users that provide additional information about the financial health of the company.

As a business owner, you may be so focused on operations or may not be versed enough on GAAP reporting that you cannot properly assess the performance of your accounting team, which brings us to our second point.

2. An Assessment of Management
As mentioned above, a review or audit can be considered a report card for your accounting department. A review or audit, through inquiries, analytics and substantive procedures can help to identify some shortcomings in the financial reporting process. As an owner, you may have hired your controller solely based on their resume and not completely understood the value that they add to your organization or that they are not fully fulfilling their responsibilities.  At the conclusion of the review or audit, we take the time to discuss our findings with ownership which includes an assessment of the accounting department and internal controls. Based on our vast experience with organizations of all sizes and various industries, we may find a variety of inefficiencies that you can address. For example, the controller may be overqualified for the position and therefore the costs associated with that position can be reduced. We may find that the company’s accounting team is too small for the required tasks at hand and to avoid fraud or errors, additional staffing is required. We can be that extra set of independent eyes that allows you to make informed decisions.

As a business owner, there may come a time or opportunity to sell the company. It is important to know how your company will be perceived by an outside party looking to purchase your company which brings us to our third point, being ready in the event of an acquisition.

3. Be Ready in the Event of an Acquisition
A reviewed or audited financial statement can bring added assurance to a prospective buyer. If the company is being independently reviewed or audited annually, the prospective buyer can place more reliance on the opening and closing balances as well as the year-to-year activity. We have seen it all too many times where a previously unaudited company undergoes an audit as the result of an acquisition and all kinds of issues are uncovered. Many times, these issues kill the deal which can be both heartbreaking and costly.

In addition to this, many times the buyer requests various historical documents, including tax returns, agreements and contracts. Most of which are requested and maintained by your auditor each year. The review or audit can help to keep management organized and on top of these documents. In many cases, as auditors, we are asked to provide management a copy of an agreement that was misplaced by them. We are usually able to go into our internal records and find the documents.

Due to our role as a CPA, we can assist in the acquisition to due our familiarity with the company. As opposed to an outside CPA who has to come in and quickly get up to speed with the business.

While reviews and audits can be costly, we believe that in most cases the benefits far outweigh the costs. The pitfalls associated with foregoing an audit or review can be very expensive. As with any vendor, we encourage business owners to seek bids from multiple firms to get a sense of the market and what will be provided. At Cambaliza McGee LLP, we offer a very personal touch to our service. Once engaged, we offer direct year-round support to our clients at no additional charge. We become vested in the overall success of the company.