Preparing for Success: Tips for Achieving First Year Audit Readiness of Portfolio Company
In the year, your company went through a transaction which requires an Audit. The team is tired from the due diligence and the new cadence. What can you do to make sure the first year audit goes smoothly.
- Understand the timing and obligations based on the Debt and/ or Operating agreements
- Develop roadmap from close of transaction through audit readiness.
- Develop and agree on cadence of professionalization over the finance and accounting function as the financial statements are readied for audit.
- Select the right Audit Firm, early as possible
- Ensure you are clear with them as to where you are and key areas which are developing
- Find a firm whom is used to working with clients going through a First year audit.
- Ensure they have capacity and can help you plan early for key things which can be done off cycle.
- Ensure you understand the period of time the audit will cover
- Most times it is from transaction date forward, but it may cover pre-close periods
- Understand any material adjustments from the QoE process and understand what accounting changes may be needed to get to full GAAP.
- In order to perform the audit, the Audit firm will need to Audit the Opening Balance Sheet
- Therefore, you need to ensure the purchase accounting was done properly. Auditors normally would like to see a technical memo detailing the transaction and the key assumptions used in the accounting.
- If material inventory exists, were they able to attend the physical taken at close
- Ensure you are aligned with the audit firm whether a tangible or intangible valuation is needed and obtain their input on the scope.
- Understand you will likely need to provide the same level of information on the Opening Balance Sheet as the yearend balance sheet.
- They will perform cut-off testing, so it is best to ensure it is tightened up through your review, so they are captured in Net Working Capital Settlements.
- If at all possible, have them complete this work prior to the yearend audit
- If allocation of intangibles out of the excess purchase price are identified make sure a plan to identify which intangibles are relevant in the business acquired and engage with appropriate specialist to value the intangible assets in accordance with ASC 805 Business Combination guidance.
- In order to plan the audit, the Audit firm will need to walkthrough significant accounting processes
- Documentation of significant accounting processes are a key component of the audit firms understanding relevant people, process and systems before walkthroughs can be performed.
- Make sure there is a plan to identify and document the people, process and systems involved in each significant accounting process.
- Document the Key accounting principles that are relevant at your Organization; including but not limited to Revenue Recognition, Fixed assets Capitalization, VIE Consolidation, Share Based Compensation, Private Company accounting elections (goodwill amortization, grouping intangible assets with goodwill, other than trade name), etc.
- Implement a strong month-end close checklist to ensure you have key processes covered
- If you have not drafted financial statements previously, ensure you have the right support or resources to assist.
- Ask for the List of Documents you will need to provide the auditor well in advance, so you understand what will need provided and can prepare.
How we can help
CLA professionals help organizations of all sizes in all industries assess and prepare for post transaction financial needs. We can work with you to help design, implement, and monitor processes and mechanisms that help you be successful.
Craig Arends is a principal at CLA and is the managing principal of CLA's private equity practice. Craig brings a concentration of experience in providing accounting and transaction structuring advice for leveraged recapitalizations, purchase accounting and SEC reporting, assessing quality of earnings, and GAAP accounting. He has far-reaching experience with critiquing financial models and reviewing target companies' financial performance to identify cost reductions and/or operating efficiencies Craig has more than 30 years of experience in public accounting serving public companies, private equity groups, and companies, including a term as principal in charge of a Big Four Capital Markets Group in Moscow, Russia. He has led financial accounting due diligence projects for private equity investor groups and venture capital funds, primarily in the technology, communications, and manufacturing industries, as well as assisting with Foreign Corrupt Practice Act matters ranging from investigation of payments made, validation of compliance with corporate policies, and review of proposed transactions to ensure compliance. When not working, Craig enjoys watching any sports, but his most favorite are baseball, football and soccer.
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