Many closely held businesses get their financial statements audited as a requirement of a loan or regulation. Few seek out the audit—and even fewer may actually enjoy the audit. However, there are many valid reasons to enlist the services of a good auditor who will provide a valuable perspective and start a helpful conversation.
Financial statement audits are designed only to have the auditor render an opinion on whether the financial statements are fairly stated in accordance with Generally Accepted Accounting Principles (GAAP). Contrary to some folklore and frequent requests, audits are not designed to ferret out fraud, waste, abuse, internal control failures or mismanagement. However, you can get value out of the audit by being engaged with the process and using the auditor as a resource for ideas and improvements.
First, meet with the auditor before he/she has completed the audit
The auditor generally is required to communicate the general scope and planning issues to those charged with governance and is required to perform some inquiries with management and the board. When you meet with the auditor, ask them specific questions about what risks they see and how they will respond. Let them know your areas of concern if not covered by their process. This will allow them to touch on or design tests that will help alleviate or confirm your concerns.
Second, get feedback on your processes and internal control
Auditors are required to understand internal controls and related processes in order to design testing of the financial statements. An auditor is required to communicate any significant deficiencies they find, however, they aren’t required to communicate deficiencies not considered significant. Rather than requesting a formal report on items that are not significant deficiencies, have them first verbally report their observations. If you want something further in writing, you can request it after the discussion. Often, the discussion is sufficient.
In your planning meeting, suggest your auditor first ask your employees about the quality of your processes, and how they could be better. Employee feedback is frequently overlooked, and yet it is most valuable.
Third, study the underlying items that were identified as misstatements
Companies do not operate error free, each and every day. If you want to improve, you should understand not only what error occurred, but how an error occurs and what can be done differently to prevent it in the future.
Finally, request an industry comparison
In your concluding meeting with the auditors, request comparisons of your company metrics to others in the industry and to your prior years. Have a discussion about where they think you can do better and where you think you can do better.
It’s a bit like visiting your doctor for a physical. I know I shouldn’t eat donuts and French fries and that I should exercise daily. But when my doctor tells me this and backs it with data, it’s a bit different, and at the end of the day, he’ll give me something more to think about than if I’d tried to figure things out on my own.