Benefits of a Financial Statement Review
Benefits of a Financial Statement Review

An audited financial statement is a financial statement that has been prepared in accordance with generally accepted accounting principles and has been audited by an independent certified public accountant in accordance with generally accepted auditing standards and includes footnotes to the financial statements.  It’s the audit team’s duty to review the company’s documents, processes and procedures during the course of the audit.  Once that’s done, the audit team will issue an opinion on whether the financial statements are presented fairly, in all material aspects, in accordance with the financial reporting framework.

For privately held, middle-market companies, the value of reviewed or audited financial statements are sometimes viewed as merely an expensive obligation to meet their bank loan requirements rather than providing a true benefit to the company and it’s owners or management team.  The work of an independent certified public accountant can trigger some resistance from the company being audited.   It can feel invasive and time consuming to the company’s staff but when viewed in a different context, the benefits of a financial statement review or audit are worth the effort.

How can your Company benefit from a review or audit?

  1. Industry-focused audit teams can provide industry insight and updated practices.
  2. With the help of an audit team, management can improve accounting controls and operational inefficiencies while learning additional best practices within the industry.
  3. An annual review or audit can support proper regulatory reporting, compliance and implementation of newly issued accounting standards in a timely manner.
  4. An audit team brings years of experience from other clients and other business situations which can be applied to your Company’s issues.
  5. The Company can benefit from an external expert providing recommendations for improvement of any internal control deficiencies identified.
  6. An audit will determine key metrics from your financial statements which can help management run the Company more profitably.
  7. An audited financial statement will reveal margins that indicate how well a Company is managing its growth.  By addressing gross profit relative to sales across several time periods, management can identify when cost increases are outpacing revenue gains.  A review of gross margin may prompt management to re-negotiate prices with suppliers or revise processes to eliminate production inefficiencies.
  8. An analysis of a Company’s operating margin over time can help management determine whether the Company’s cash position is likely to improve or decline. The operating margin shows the full impact of a Company’s pricing strategy and its operating efficiency.  Sometimes, increases in sales may decrease profits and that information is important as a management tool.
  9. Benchmarking, which is comparing a Company’s margins to others in the industry, can help management figure out whether the Company is ahead or behind the curve.

Here are three immediate and long-term benefits to conducting an annual financial statement review or audit:

  1. Companies that undergo annual financial statement reviews or audits are generally more profitable and better managed than companies that do not undergo a review or audit.

It’s important to remember that auditors have decades of experience with observing what profitable companies do well and what unprofitable companies do poorly.  Identifying small opportunities for improvement can be the key to a company’s profitable future.

  1. Financial audits improve communication between management and shareholders.

Management is aware that there’s a high possibility that the external auditor’s work will lead to the discovery of errors, whether intentional or unintentional.  Therefore, there’s extra effort to make sure the accounting is as accurate as possible all year long.

  1. Companies that undergo annual audits are worth more than companies that are not audited annually.

During the due diligence process, buyers want to see a solid history of audited financial statements, usually three years, before making a decision to purchase a company.  It becomes easier to attract investors, buyers, and lenders, if a company can demonstrate to outside parties that their financial statements are reliable.  In turn, this makes a company more valuable and attractive to third parties.

The financial statement review or audit process is a unique opportunity to develop a thorough understanding of a company and the industry in which it operates.  LSL CPAs audit team meets with management at the conclusion of the audit to offer proactive solutions to maximizing profitability and efficiency.

Make sure you contact your LSL Advisor today for more information.

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