Most likely, your company prepares internal financial statements and then has an outside accountant review them and prepare the tax filings for the company. Is this enough to get through a transaction? The answer is most likely that it is not.
There are three levels of external accounting review: Compilation, Review, and Audit.
Compilation: Compilation is the most basic external review. The accountant assists the company in presenting financial information without undertaking to obtain or provide any assurance that they are correct. In a compilation, the accountant generally does not perform any independent review of any of the company’s financial information.
Review: Reviewed financials involve the accountant performing analytical work to provide a reasonable basis for obtaining limited assurance that the financial statements are correct. Therefore, the accountant opines that based on his review, he or she is not aware of any necessary material modifications to the financial statements.
Audit: Finally, in an audit, the accountant provides his opinion that the financial statements are correct. To reach this result, the auditor performs significant verification and substantiation procedures and obtains an understanding of the company’s internal controls.
You can make a transaction go much more smoothly by anticipating the needs of potential acquirers and putting in place an appropriate level of accounting review.
Buyers most often want to see a detailed review of a seller’s financials that is vetted by a professional and independent accountant. Ultimately, most buyers require an audit of the seller (or a review that looks a lot like an audit called a “Quality of Earnings Review.”) Well prepared sellers anticipate this need and start auditing their financials in the year or two prior to selling. This actually accomplishes two things. First, it meets the needs of the potential buyers. Second, it flushes out financial (and sometimes business) issues when the company still has an opportunity to react to them. Discovering financial issues during a transaction is difficult for everyone, but particularly the seller, who will find such issues used as leverage against the company.
While outside accounting review can be costly, it is well worth the cost and can pay for itself many times over during a transaction.Share: