How To Prepare For A First Year Audit

How To Prepare For A First Year Audit

Acquisitions make for exciting times. Management is stressed out while the enterprise is going forward to invest, and the target company has to get ready to be purchased. Often the one crucial thing that everyone overlooks is year-one audit readiness.

The same goes directly after the acquisition. The focus now falls on all the post-acquisition agendas, and no one seems interested in any audits that lie ahead.

When management does not prioritize the first audit, the company’s risk of late reporting goes up. Whenever you buy a company, you have to work with an audit partner to prevent the same.

Audit Planning

The firm has to prioritize the audit at the highest levels, especially the firs audit, which is typically the most difficult because management is usually not as well prepared as they should be, which can add pressure on the available time and resources. Preparation is vital to prevent late reporting.

Benefits Of Audit Efficiency

An efficient audit frees management to focus on critical operational goals (100-day integration plan and EBITDA. If a readiness audit team can handle the issues that might arise during the year of acquisition, audit efficiency is all but guaranteed.

For example

Purchase price accounting requires accounting for the flow of funds and the involvement with a valuation team.

If a readiness team possesses the required expertise in valuation and business, critical deadlines with the banks and internal deadlines (such as group consolidation) can most likely be met.

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Steps Towards Audit Preparedness

  • Allocate internal responsibilities for the handling of the audit.
    • Include scoping the level of resources
    • Include the level of expertise required for the audit
    • Set a timeline for project management

During an acquisition, most of the responsibilities fall on the portfolio company, but the purchase group will probably use a go-to firm to communicate with the portfolio company management.

  • Get the valuation done before the audit starts.
    • Delayed purchase accounting or valuation can lead to immense pressure during the audit. If this causes a delay in finalizing the audit for the banks, it can restrict the availability of refinancing.

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Building A Winning Audit Readiness Team

A winning readiness team should combine experience in the industry with experience in purchase accounting.

  • The risk of an audit adjustment that impacts EBITDA can appear in the opening balance sheet or during purchase accounting exercises.
    • One of the main goals is to avoid surprises
    • If the enterprise does not have the required expertise or resources, it is wise to bring in external accounting consultants who do.
      • It is helpful if the team (or consultants) can point out
        • Standards and regulations that apply
        • Which accounting framework will work best
        • Help to connect the accounting standards for different countries (GAAP & ASPE)
        • Study the statement of earnings or quality of earnings to identify areas of potential concern.
      • If the US Securities and Exchange Commission or the Canadian Reporting Issuer independence level is required, it limits the technical accounting consulting (TAC) services that the audit firm can provide.
      • Under the American Institute of Certified Public Accountants and Canadian nonreporting issuer independence levels, TAC can provide significant assistance.
      • It might be prudent to determine if the firm should adopt Private Company Council Standards. Certain companies can significantly benefit from adopting these standards.

Key Points To Remember

  1. It is an audit, not an afterthought. Preparation reduces the risk of missed reporting deadlines, which will increase costs and put a strain on the firm’s time.
  2. Conduct the required valuations.
  3. Scope the audit.
  4. The readiness team should have experience in the industry.
  5. Accounting and independence standards are complex and vary from one country to another.
  6. Some requirements are legally required.
  7. Hone in on complexities especially when facing deadlines.
  8. Communication is key.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

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Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me and follow us on Facebook : FAS CPA & Consultants.

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