1) Users of the financial statements – Who is requiring third party assurance? Many times, a lender or investor will have a specific requirement (i.e. audit or review) depending on the level of financing or funding involved. If your family-owned business is looking to obtain funding or capital, it helps to plan ahead based on the anticipated needs of the financial statement users. An audit can require a significant amount of planning, sometimes up to a year in advance, so it is best to be proactive when thinking about the needs of financial statement users.
2) Owner Involvement – How much involvement do you have (or care to have) in the day to day operations? The higher the level of assurance you obtain, the more confidence you can have in your accounting/finance team and their controls and processes in place. While a review focuses on inquiries of management and analytical procedures, an audit includes analytical procedures, detailed tests of account balances and activity and consideration over internal controls and processes. These audit procedures can assist in giving you a higher level of confidence over your company’s financial reporting and also help you to gain insight into best practices within your industry.
3) Maintaining Shareholder Confidence- Higher levels of assurance in the company’s financial reporting can also provide confidence and comfort to the members of the family who own the company but who are less involved in the day-to-day operations, and can prevent misunderstandings about how the company’s assets are being utilized and protected.
4) Resources– Depending on the level of assurance needed, one consideration should always be the resources you have to dedicate to the assurance process. While a compilation, which includes a report from an external CPA but provides no assurance, generally requires minimal dedicated resources, an audit typically involves a substantial period of time where the audit team will be on site, during which staffing resources can be consumed.
5) Cost – Cost is almost certainly a factor when determining the right level of assurance for your business. As the level of assurance increases, so will the amount of time an audit firm dedicates to the engagement, which factors into the cost. A compilation, which provides no assurance, will have much less time involved and is therefore the option with the lowest cost. A review provides limited assurance, and an audit is the highest level, which corresponds to the highest cost. The most cursory compilation for a very small business may cost as little as a few thousand dollars and a complete audit for a Fortune 500 company may cost upwards of $1 million. Be sure to engage your CPA in discussions about cost before you commit to one or another route.Justin Neff is Certified Public Accountant and a Senior Manager with Moss Adams, LLP. He specializes in providing assurance and financial reporting services to middle market private companies. His clients include a wide variety of businesses, with a focus on the food and beverage, manufacturing and consumer products industry groups. Justin can be reached via email at email@example.com or directly at 206.302.6420. Drew Steen is a business transactions attorney at Davis Wright Tremaine, LLP. He represents both buy-side and sell-side clients in mergers and acquisitions, venture capital investments, joint ventures, equity co-investments and restructurings. He also serves as regular corporate counsel for several closely-held and family-owned companies. Drew can be reached via email at firstname.lastname@example.org or directly at 206.757.8081