Does a Startup Need Audit?
Who hasn’t heard the phrase “startup”? Surely, many individuals are familiar with that term. A startup is a freshly formed company that is looking for a repeatable and scalable business plan. A startup is established with the purpose of delivering a new product or service in the presence of uncertainties. So, in these uncertain conditions, does a startup require an audit?
There are some circumstances that would lead a startup company to conduct audits. An audit of a startup company is required when an equity investor asks one, which usually occurs in conjunction with a fundraising round. An equity investor may request complete disclosure of the financial records from a third-party expert. An audit of a startup company is needed when the company is asking for a bank loan or credit line. Not every bank will insist on a financial audit of the company. However, many businesses of a certain size do require them. An audit is also recommended for every firm preparing to sell their firm. Almost all potential buyers will want one, since they want to make sure the stated results are in accordance with GAAP. Financial accounts that have been audited for two to three years may aid to raise the sale price. An audit of a startup company is necessary if it is planning an initial public offering and is preparing to sell stock to the general public. Before going public, the company will need three years of audited financial statements. Finally, if the board of directors intends to ensure that the financial statements are proper and that the company has met its financial objectives, an audit is also required.
In order to have an audit, a startup company must prepare the financial reports and the supporting documents linked to the business’ financial activities. All of the records must be current and correct. A startup company must ensure that its documentation is clear, well-organized, and accessible to use. This will make the audit process go more quickly and efficiently. If a startup company has previously adhered to GAAP accounting rules, the audit process does not necessitate additional time to restate the financials in order to assess the company's financials against a common set of standards. The most critical part of audit preparation is maintaining comprehensive financial records for all transactions, including those that have no impact on cash flow or the balance sheet.
An audit at a startup company provides a number of benefits, especially in the long run. An audit allows companies to analyze their financial accounts in a practical and efficient manner. A start-up company's founder can also guarantee that the company follows accounting rules. Because many businesses are run by entrepreneurs who are inexperienced with the accounting processes and procedures required to produce appropriate financial reports, a company that already follows accounting standards can provide investors with peace of mind. Audits also assist the company in avoiding litigation or charges of fraud and negligence.
Whether or not an audit is needed in a startup, it depends on the circumstances of each company. If a startup wants to begin the audit process, there are two most important things to keep in mind, preparation and communication. Every founder must be mindful of the best decision for his or her company. However, the existence of an audit will provide the company with various advantages in the future.
Salamzadeh, Aidin and Kawamorita Kesim, Hiroko, (2015). Startup Companies: Life Cycle and Challenges. Proceedings of the 4th International Conference on Employment, Education and Entrepreneurship (EEE), Belgrade, Serbia.