Do You Need an Audit?

By Tom Taulli

Over the past few years, we have witnessed the break-down in the accounting profession. Independent audits were not really independent and failed to detect huge frauds at companies like Enron, HealthSouth, and WorldCom.

Does this mean an audit of the financials is worthless? Far from it. It can be a very important tool for the buyer ñ and even seller.

First of all, an audit is conducted by an independent CPA (certified public accountant), which analyzes a companyís books according to generally accepted accounting principles (GAAP).

Of course, a buyer wants audited financials because it allows for more comfort. Then again, an audit can be helpful to the seller, since it tends to facilitate a smooth transaction.

The problem? Well, an audit can be expensive and time consuming. Simply put, it may be an impossibility for a small or even medium sized firm.

Alternatives to an Audit

But keep in mind that there are alternatives. For example, a seller can hire an outside firm to conduct a review. This is a less comprehensive approach, but is
still in accordance with GAAP. Besides, it involves the participation of an independent CPA.

Or, the seller can get a compilation from an independent CPA firm. Keep in mind that this is a fairly lightweight approach; that is, the CPA is taking all information from the company at face value.

Conclusion

So, if the transaction value of the seller is fairly low (say below $5 million), a review may make sense.

Regardless of whether there is an audit or review or compilation, a buyer should still do its own investigation of the financials. Generally, CPA firms do a good job with their analysis ñ but it is far from full-proof. As with anything, a buyer should never scrimp on the due diligence process.

MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the managing editor of our MergerPlace M & A Advisor™ E-zine.

Tom Taulli is an expert in the M&A process. He is the author of the critically acclaimed The Complete M&A Handbook (Random House) as well as six other books written for publishers such as Bloomberg and McGraw-Hill. Tom also teaches M&A at the USC School of Business.

Tom has been quoted extensively in the press, including the Wall Street Journal, USA Today, Barron's, and The Los Angeles Times, and has provided commentary on CNBC, CNN, and Bloomberg TV, as well as appeared on a variety of top radio stations across the country.

Tom's books are available for purchase in our bookstore.

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