Audited Financial Statements Benefit Middle-Market Companies
Audited financial statements provide shareholders, investors and lenders of lower middle market and middle market companies the highest assurances of the financial strength of a business. They cost more than any other type of financial statement, but they often provide greater access to capital at a reduced cost, in most cases offsetting the cost of the annual statement preparation.
There are four kinds of financial statements.
- Internally prepared
- CPA compilation,
- Reviewed, and
- Audited.
Each type is considered by the accounting and finance industry as being more reliable than the one before.
Audited Financial Statements Carry Higher Reliability
Audited financial statements carry the highest level of reliability according to the accounting industry. Many business owners wonder when they should spend the time and expense for an audited set of financials. Audited financial statements are very thorough examinations of your company and its financial processes. When an auditor gives an unqualified opinion as to the financial health of your company it has many practical implications.
How Much Can A Company Expect To Spend on Audited Financial Statements?
Depending on the size and complexity of your company, the costs of having audited financial statements ranging from $20,000 to $50,000 annually. It’s a serious commitment. For a very small company the cost could be below $10,000.
The most important consideration when deciding on whether to engage an accounting firm for an audit depends on several issues.
Provide Assurance to Shareholders
If your company has more than a few shareholders, getting audited financial statements is potentially worthwhile. The higher the number of shareholders a company has the greater the chance that one of them may bring litigation because of your business practices. Audited financial statements may help reduce the cost of litigation and may even prevent it.
Sophisticated shareholders will appreciate receiving their copy of the annual audit and will be more inclined to invest additional capital should you need it.
Lower Borrowing Costs
Banks and institutional investors will often make more capital available to businesses that take the time to provide audited financial statements. Decisions can be made quicker and the cost of capital may be less too.
It is normal for an institutional private equity fund and some banks to require audited financial statements in the second year of a relationship. Asset-based lenders often also require audited financial statements.
Audited Financial Statements Are Necessary Before A Public Offering
Any company planning on having an initial public offering is required to have three years of audited financial statements before they are permitted to sell stock in the public markets.
In many cases, a business that is planning an IPO at the beginning will spend the money so they have audited financial statements for every year of business.
Selling Your Business Within The Next Three to Five Years
If you believe you may sell your company in the next 3-5 years, having audited financial statements for the two or three years prior to the sale can help increase the price of the sale because the potential buyer has very strong financial statements to evaluate. This is a risk/return analysis because if your company is very small you won’t realize the benefits that you will when you are larger. It is rare that you don’t see a positive return on investments from having audited financial statements before a sale, merger, or acquisition of another company.
A Requirement for Certain Government Contractors
Certain types of government contractors are required to provide audited financial statements as a condition to receiving “set-aside” government contracts. If you participate in the SBA 8a program and get to a certain size, the SBA may require you to upgrade your financial statements to either “reviewed” or audited.
For companies required to provide performance bonds, such as construction companies and subcontractors, you may qualify for a larger bond and may have a reduced cost for bonding because you have audited financial statements.
Help Reduce Internal Losses
When your company reaches a certain size (either in number of employees or sales) it may be desirable to get audited financial statements because audits can detect employee fraud. On a national basis employee fraud represents approximately 6% of company gross sales.
In addition to fraud, finding waste in larger businesses is also a potential benefit to having audited financial statements.
Your CPA can help you decide what type of financial statements should be used for your company, but keep in mind that sometimes spending the money for an audit can result in a saving you money due to theft and if you are planning to sell your business may help make the sale smoother with a higher sales price.
If you would like additional information on about how your financial statements could potentially help you when obtaining financing, please give one of our Business Finance specialists a call at 512-990-8756. We aren’t CPAs, but we know what it takes to get most types of companies financed!