Many business owners think that as long as their companies remain private, they don’t have to get a financial statement audit. However, when it’s time to get financing from a bank, they may find that an audit is recommended, and even required. The following insight into audits may help you better understand why they can be helpful for you and your business.

First, according to a study cited in “Entrepreneur” magazine, companies that provide banks with audited financial statements generally can expect lower interest rates than companies that don’t have their statements audited. Of course, not all banks require an audit. A review provides less assurance, but for some banks that may be enough, and it’s a much less expensive proposition.

Most experts agree that it’s not sufficient to simply rely on your banker’s interpretation of your QuickBooks files. The Bplans entrepreneurial site (run by Palo Alto Software) notes that some level of assurance is a good idea, and quite possibly a requirement at any lending institution. Ask if the bank requires or recommends an audit — it may be worth the thousands of dollars you’ll have to spend. A bigger business may already have audited statements that were done for other purposes, but smaller businesses may not. Your CironeFriedberg CPA can advise you if and when a review may be sufficient for your particular situation.

Getting Venture Capital Funding

A common question is whether there’s a need for audited statements when you’re seeking cash from venture capital firms. The answer is generally yes. A lot may depend on what stage the company is in. An early-stage company may not need an audit or review, because the venture capital firms are more concerned with potential. However, if it’s a more established company, and it’s relying on its history as an important basis for seeking funding, then it may have to show audited statements.

No matter what the VC firm requires upfront, however, you can expect that it will require audits going forward as part of the terms of its investment.

Similarly, if you’re at a later stage in your company’s life — for example, seeking to be acquired as part of a retirement plan — you may need to have audited financial statements to show any potential suitors, even if you’re privately held.

Do you need an audit or a review in your situation? Give us a call, and we’ll go over your situation and financing needs, and help you make the right decision.

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

The Internal Revenue Service (IRS) doesn’t require nonprofits to have independent audits, but that doesn’t mean your nonprofit never needs an audit. Some federal, state and local government agencies require audits, as do some banks and foundations. For example, Connecticut requires an audit if gross revenues exceed $500,000. Generally, the requirements relate to the nonprofit’s size or spending.

When an Audit Is Required

An independent audit might be required in the following circumstance:

To respond to a request. A federal, state or local government requests a copy of your nonprofit’s audited financial statements.
To verify assistance. A nonprofit spends more than a certain about in federal or state financial assistance. Keep in mind that this amount includes funds received directly from the agency as well as funds that come through another entity (e.g., a donor-advised fund).
To solicit funds. A nonprofit is in a state that requires audits if you solicit funds by mail, phone or other means in their states, even if the organization isn’t located there. In states that require it, the audit must be submitted as part of the registration process.
To contract services. A nonprofit has a contract for services with federal, state or local government that requires an annual financial statement audit.
To apply for funds. A nonprofit receives or wants to apply for funding from a foundation or other entity that requires audited financial statements.

These requirements are straightforward. If your nonprofit falls into any of these categories, an independent audit is required.

When an Audit Is Beneficial

Sometimes, however, it is a good idea to have an audit even if one is not required. Better community relations and greater transparency can be compelling reasons to have an audit. Here are three ways an audit can be beneficial:

Demonstrates transparency. By eliminating the deduction for charitable deductions for taxpayers who don’t itemize their deductions, the Tax Cut and Jobs Act of 2017 (TCJA) has made obtaining funding more competitive. It has been estimated that nonprofit contributions may drop by $20 billion per year. This makes it even more important for your nonprofit to convince donors that their donations will be used to further the organization’s mission. Having an independent audit supports this argument by demonstrating your organization’s commitment to financial transparency to the public, the media and watchdog groups. An independent audit can support this argument.
Enhances internal controls. An independent audit can monitor your nonprofit’s internal controls and help prevent theft and embezzlement. Although these audits aren’t foolproof, they can spot vulnerabilities and risks that aren’t apparent on a day-to-day basis.
Increases accountability. As part of its fiduciary responsibilities, your nonprofit’s board of directors is responsible for overseeing its financials. Having an independent audit helps the board and the nonprofit’s executives be more accountable.

For some smaller nonprofits considering an independent audit that is not required, the cost of an audit may outweigh its benefits, however. These organizations should consider more cost-effective alternatives, such as a review, compilation or agreed-upon procedures. A review, in contrast, is a lower level of assurance on the reliability of the financial statements. It may be appropriate for some smaller nonprofits.

Another service is a compilation, where a certified public accountant takes information supplied by management of the organization and prepares financial statements, without offering any assurance. The differences between an audit, review and compilation are significant and warrant in depth discussion before deciding which route is right for your nonprofit.

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