We recently completed a survey of approximately 100 CFOs about their audit experiences and identified 4 key insights:
- Audits fall into two important categories
- 5 actions will help you fall into the “easy” category
- Audit pricing generally falls into two categories: $5-7.5K or $20-50K
- Most CFOs make an auditor selection based on 4 factors
A Tale of Two Audits: Two Important Categories
It sounds kind of silly but audits are either “easy” or “painful.” There really isn’t much of a middle ground according to the CFOs that we surveyed. Maybe 11% fell into a middle category but almost 90% fell into an “easy” or “painful” category. Approximately 48% of audits were “painful.”
This is important because it means that statistically speaking, your audit is likely to fall into one of these two camps as well. It it possible to have a relatively easy audit. So what can you do to improve your chances of that result? Let’s talk about that next.
5 Actions To Ensure Your Audit Goes Smoothly
The full report contains a lot more information about how to make sure your audit goes smoothly but we identified 6 key actions from the data that correlated with smoother audits:
- Hire the right staff
- Prepare and get organized
- Consider getting a review before your audit
- Focus on your initial period balance sheet
- Collaborate with your auditor regularly
#1 Hire the Right Staff
The most common piece of advice CFOs wanted to give to other CFOs about to go through their first audit related to a company’s team. CFOs recommended “having a strong controller and educated staff,” “having financial leadership who has operated in audit firms before,” and “hiring or retaining competent experienced employees or advisors who can guide you through the process.”
Many CFOs touted the benefits of hiring individuals who have either worked at an audit firm or who have gone through an audit before.
#2 Prepare and Get Organized
Almost 1/3rd of all of the CFOs we surveyed highlighted the importance of preparation. CFOs who found the audit relatively easy “documented everything,” “got organized,” and/or performed “regular self-audits” well before their first audit. They were expert at keeping detailed historical records.
Many CFOs highlighted the importance of using outside vendors to improve record-keeping and “auditability.” Since we focused on venture-backed CFOs, our data stressed the importance of keeping good shareholder, investor, and equity records. Surveyed CFOs recommended using good outside counsel and tools like Shareworks Startup Edition to minimize record-keeping issues with complicated debt and equity fundraises.
The categories above caused venture-backed CFOs the most pain during the audit process. After “documenting processes,” “stock option expensing” was a key problem area.
We’ve found this to be a big pain for Series B and later companies. It often takes years to create a model that auditors will fully accept and every year you have to make additional tweaks to the model to ensure it handles new corner cases. We’re obviously biased, but we highly recommend spending the money to get this done for you with a solution like startup edition.
Our solution can completely eliminate the hassle of creating and running your own stock option expensing (ASC 718) models and reports. Click here to get started on your ASC 718 report.
In addition to these problem areas, CFOs identified 3 “Gotchas” that almost everybody misses when preparing for their first audit.
#3 Consider a Review Before the Audit
A lot of first-time auditors don’t know that you can “ease into” your first audit by doing a Review before your official audit.
An audit review is a less expensive, less thorough assessment by a CPA firm of your company’s financial statements than a traditional audit. The goal of an audit review is for the CPA firm to assert that your financials are free of “any material misstatement.” The goal of a full audit is for the CPA firm to assert that your company’s “financial statements present fairly the financial position and results of operations of the organization.” To the untrained ear, the difference may seem subtle so just keep in mind that the first goal requires substantially less work to verify by the audit firm. As a result, reviews are significantly less expensive and time-consuming than audits.
Many of the CFOs we polled suggested that first-timers should consider getting a review 1 year before they plan on getting a full audit. The review is easier, less time-consuming and less expensive. But the CFO’s team still has to do most of the prep work required for a full audit. The upside is that the next year when you do your full audit, you will have already done much, if not most, of the heavy lifting.
#4 Focus on Your Initial Period Balance Sheet
Financial accounting begins with the balance sheet. The balance sheet forms the basis of all of your company’s subsequent accounting. So it shouldn’t be surprising that audits begin with the balance sheet.
The “initial period balance sheet” is especially important because it forms the foundation for literally every subsequent accounting transaction. As such, our CFO friends mentioned that it was one of the most critical aspects of making their audit go smoothly. Anything you can do to gather documentation and justification for your initial period balance sheet will have an outsized effect on the rest of the audit.
#5 Collaborate with Your Auditor Regularly
Almost every CFO we spoke to mentioned the importance of developing a healthy and collaborative relationship with the auditors. Obviously, this is easier said than done.
CFO’s highlighted several specific strategies you should use to improve collaboration with your auditors:
- Start the relationship and the audit early
- Don’t let the auditor overwhelm you–coordinate their site visits and document requests based on your timing
- Don’t “let the auditor in” until you are done with as much in house as you can
- Make sure you understand the firm’s audit approach and specifically what they will dig into
- Work with the audit team as they scope their procedures…you may be able to provide recommendations on more efficient ways to test balances, etc.
Typical Price of an Audit
Our research shows the audit pricing is bimodal. Early-stage companies working with smaller audit firms often pay around $5-$10K. Larger companies working with larger audit firms can pay anywhere from $20-75K on average.
4 Auditor Selection Factors
Most auditors make selection based on 2 primary factors and 2 secondary factors.
The primary factors are:
- Reputation of the audit firm, and
- Industry expertise of the audit firm
The secondary factors are:
- Recommendation from a trusted advisor, and
While price is a factor, it was the least important of the 4 according to our survey.
We hope you enjoyed this summary of the 2018 Startup Audit Survey! Next year, we hope you’ll participate in the survey and give back to the next generation of up-and-coming startup CFOs. In the meantime, let us know if you have any thoughts or questions.
Be sure to download the full research report. In addition to more detail on the insights we shared above, you’ll find: