The Financial Audit: An Unexpected Catalyst for Efficiency and Growth

Most people hear the word “audit”, think of the IRS, and shiver. But in the business and nonprofit worlds, a financial statement audit is simply a commonplace process used to provide information to various groups, including banks, investors, grantors and the state. Savvy business owners and nonprofit leaders know a well-kept secret: audits identify ways to improve internal controls, the bottom line and convey that information to all interested parties.

At Cray Kaiser, we say financial audits reveal blind spots. But we prefer the comparison a client recently made that equated audits to opportunities. He appreciated the chance to learn more about the financial operations of his company, specifically identifying ways to increase the financial reporting requirements, identify areas to reduce costs, and strategically identify opportunities that affect growth.

Financial Statement Audits Explained

Beyond the typical association of financial audits with the IRS, most people believe that an audit is being conducted any time they see professional accountants in their place of business. However, an audit is just one of three kinds of financial assurance procedures. From least expensive and least involved to most, financial assurance procedures include compilations, then a review and finally, an audit. An audit is the most detailed and involved financial assurance procedure, and it provides the most data to businesses that want to sharpen their financial reporting, identify internal control deficiencies and grow strategically. [Be sure to follow our blog to catch an upcoming post describing the differences between the three kinds of financial assurance procedures.]

Added Benefits of Financial Audits

Beyond meeting requirements from banks or potential investors, or as part of nonprofits annual tax filings, financial audits provide additional benefits and opportunities to create efficiency and influence strategy and growth.

  1. Identifying blind spots. An audit can identify any deficiencies of internal controls, which open up the risk for fraudulent activities. A recent audit we conducted revealed exposure to fraud in accounts receivable processes. Sitting with the receivables clerk, something that would not have part of the process with another type of assurance procedure, the lack of internal controls quickly became apparent. A few quick and easy checks and balances suggested in the audit report greatly reduced this client’s risk of fraud with little added effort from the staff involved.
  1. Ensure accuracy of financial statements. You use your financial statements to help you make decisions that are integral to the growth and success of your business. Yet simple errors can have a significant impact on your financial statements. Another recent audit we conducted uncovered improperly valued inventory. This error had a serious impact on our client’s financial statements which had already influenced decisions about the direction of the company. This client was grateful that he had requested an audit for the sole purpose of discovering inefficiencies in the financial reporting without any requirements for an audit by his bank or investors.
  1. Provide accurate data for tax forms. Reducing the likelihood of errors in tax filings lessens the chances of being questioned by the IRS.
  1. Reduce personal risk. Recently, a bank removed the requirement for personal guarantees from a line of credit for a client because the client went from having a reviewed financial statements to an audited financial statement.
  1. Improve cash flow. Cash flow is often compromised by mismanaged accounts receivable timing. For example, if payments sit for a while before being deposited, there is a significant impact on cash flow. New procedures identified within the audit can create a more efficient method of deposits that improve cash flow.
  1. Keep up with technology. New technology can impact existing processes and procedures. As the audit proceeds, checks and balances that may have been eliminated with new technology can be corrected.
  1. Prepare for sale. A few years of financial audits improves credibility of a company when trying to position for a sale or a transaction of the business.
  1. Ease bank loan process. Audited financial statements provide the information a bank needs to verify accuracy when a company is soliciting a loan for growth opportunities.

Is a Financial Audit Right for Your Business?

According to Cray Kaiser Principal, Deanna Salo, “Management cannot make the right decisions without accurate, timely financial statement reporting. Having a financial audit, even if not required by bankers, investors or shareholders, can be a good way of re-tooling the accounting department and streamlining procedures and processes.” She also notes that an audit helps companies be proactive instead of reactive. One of the by-products of an audit is a management letter which includes recommendations for management.  Audit recommendations always carefully balance the need for checks and balances with the cost of the employee time involved. Is an audit right for your business? Contact us to learn more.

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Understanding Audits for Nonprofits (Part 1)