By Mike Bedel, CPA, MBA, CGMA
Partner, Director of Audit & Assurance Services
[email protected]
There are many compelling reasons to have an audit performed on your financial statements. But there are also many reasons to NOT have an audit.
As director of our audit and assurance services department, I often receive phone calls from clients and potential clients who begin the conversation with, “We need an audit for our organization.”
My response is to always ask, “Why?” Very often, I quickly find their organization does not really need an audit. Nearly always, some level of professional service is appropriate – but it is very often not an audit.
Here are some of the common scenarios that occur when leaders think their organization needs an audit – but really doesn’t.
- Suspicion of Fraud. When the suspicion of fraud rises at an organization, one of the knee-jerk reactions from board members or management is to request a financial statement audit. However, an audit is not designed to detect fraud. In this situation, we recommend that clients engage our forensic accounting services. They specialize in detecting fraud.
- Improving Efficiency. A growing organization will often come to a point where their governing board recognizes a need to review and improve the efficiency of their finance and accounting function. In this situation, a consulting engagement typically becomes the most efficient use of the organization’s resources to identify past issues with internal controls and recommend ways to improve them. While an audit does take the internal control environment into consideration as part of developing an opinion on the overall financial statements, it is not designed to provide an opinion on those internal controls or design an improved accounting process.
- Valuation. When a transfer of ownership is being considered, sometimes the current or future owners will seek an audit to help substantiate the value of the organization or ownership shares. While an audit opinion will provide assurance on the overall financial statements for a historical period, the audited financial statements are not designed to determine the current or future value of the enterprise. In these cases, our valuation services are most useful to clients. Valuation is an area of accounting that requires very specific knowledge and experience; Sponsel CPA Group has its own outstanding team of valuation experts. An audit can be a useful resource to a valuation specialist, but the audit itself is not the answer to determining the value of an organization.
- Other Levels of Service. Lenders, such as banks and other financial institutions, often require financial reporting for the financial statements when there is an outstanding loan. Depending on the size of the loan and the risk assessed by the lender, they are often satisfied with a lower level of service than an audit. Namely, a compilation or review of the financial statements is sufficient for lenders in many cases, and should cost less to the organization than a full audit.
Now is a good time to review what an audit IS designed for.
A financial statement audit is designed to provide assurance on a set of financial statements. In an audit, an independent CPA issues their opinion that the financial statements are free of material misstatement. This provides assurance for stakeholders such as owners, lenders, members and others that the financial information reported with the audit is reliable and allows them to manage their various risks.
Most often, we see that audits are required by significant lenders or by donors to non-profit organizations to provide them certainty that the financial results reported to them are reliable and can be used in their decision-making processes.
When an audit is appropriate, we are at the ready to help and serve our clients! Because we value our client relationships, however, we always seek to understand what is truly needed so that we are providing the best value to our clients and not selling them a service they don’t need.
If you think your organization needs an audit — or something different than an audit — please contact Mike Bedel at (317) 613-7852 or email [email protected].