The Briefing: Preparing for your first company audit

Editor’s note: The Briefing is our series highlighting strategic projects and insights from experienced finance pros. Follow us on LinkedIn or Twitter to get alerts for new briefings.

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When you’re a controller, your life revolves around your company’s close and audit calendar. An audit is like going to the doctor for your annual physical—it’s not always pleasant but it is recommended (and often mandatory) for your financial hygiene and to gain the trust of your stakeholders.

We recently completed our first audit at Ramp, as required per our covenants with Goldman Sachs for the $150 million debt facility we raised in early 2021. Having been an auditor at EY and PwC, as well as leading audit processes at different startups, I thought I’d share some tips for steering your company through an audit.

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Top tips to avoid audit issues

1. Choose your audit team wisely

The most important decision you'll make is deciding which audit team to work with. It's important to choose one that is a good fit for your company. You are establishing a long-term relationship with your auditors and just like you would with a recruit or a romantic partner, you need to assess and grow your comfort with your auditors.

"Just like you would with a recruit or a romantic partner, you need to assess and grow your comfort with your auditors"

Meet the full audit team before they start their work. It is important to understand their expertise and their experience serving clients in similar industries. Be proactive about asking for people with experience in auditing and accounting knowledge related to your industry. If you operate in fintech, ask the auditors to provide you with a list of fintech clients that they are currently serving.

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Audits require a level of trust on both sides, so you want to be sure you feel comfortable with your audit partner and their team, and vice versa. 

2. It’s not just about the numbers—how you present these numbers also matters

The goal of the auditors is to assure your stakeholders that your financial books are in good order, and, more importantly, that they can trust these books.

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How do you assure them? By demonstrating that you have full ownership of the audit process.

"Hesitation and ambiguity are big red flags for auditors"

Be clear about the timeline, the expectations, and the status of your books. At the first planning meeting with the auditors, communicate your timeline, the status of your accounts, and what data will be available. Regular update meetings about the PBC list ("Prepared by Client") should be scheduled weekly and sometimes daily. Establish clear protocols for communication, who should they email (or not email), and where and how the documents are going to be safely shared.

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Less experienced controllers often look to auditors to help them determine what level of documentation is needed to validate their accounting policies. Be assertive, take a position on accounting policies, and be clear about the control environment even if it is non-existent. Hesitation and ambiguity are big red flags for auditors.   

As an ex-auditor, I cannot emphasize enough the importance of cleaning all your working papers. Auditors will scrutinize everything you share with them. During your first audit, everything that your team sends should go through you so you can make sure you review these documents for any red flags, outstanding issues that need to be resolved, broken links, and inconsistent formulas. Understand what’s relevant to the audit and remove everything else, e.g. extra tabs in your Excel worksheets, extraneous calculations, links.

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Similarly, all requests from the auditors should go to you. Your auditors should never be emailing your execs or anybody outside of accounting and finance directly. Always ask for an agenda in advance of any meetings or calls so you can adequately prepare your team.

3. Get ahead of complex accounting issues

Certain accounting issues are common in startups and are always red-flagged by auditors. They include: 

• Equity and stock compensation
• IP capitalization 
• Warrants
• Related party transactions 
• Business combinations, related intangible assets and goodwill
• Contingent liabilities
• Subsequent events 

Make sure you have a good grasp of these issues as it is important to work through them with your auditing team early on. Oftentimes, the junior staff may not have the expertise to identify potential issues in these areas, so make sure that the audit partner or managers are involved early on and that they are guiding their team on how they should be reviewing your documentation. Otherwise, you risk important questions popping up towards the end of the process and delaying the release of your audit report. 

Ideally, you should be discussing and resolving your complex accounting issues as you are onboarding your auditing team. 

4. Involve your auditors in the present and the future, not just the past 

By default, auditors work in the past. They’re fact-checking events and balances that have already passed. To maximize the value of your partnership, give them insight into events that are coming up and will impact your future growth (and audits). 

"Evolve the relationship with your auditors into a partnership"

For example, if you have an upcoming acquisition, your auditors should not be reading about it in the news after it’s taken place. Rather, you should be reviewing the contract with them and having them advise you on the terms that you should look out for. 

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Evolve the relationship with your auditors into a partnership by educating them on what is important to you and using their inputs to improve your accounting processes.

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How to prepare for your company's first audit

The first audits are always extremely time-consuming because they require a lot of data cleanups, review, and accounting reclassification.

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In Ramp’s case, we had to build new reports with the support of our engineering team, prepare detailed life-to-date reconciliation for our customer transactions, provide precise cashback calculations, and go over our IP functionalities in detail. 

Step 1: Determine when you need an audit

You’ll need to complete an audit if you have investors and outside stakeholders to report to or if you’re preparing for an exit event. Your company’s leadership may also request an audit to ensure there are no material misstatements in the accounting records. 

Step 2: Choose your auditor 

Investors generally prefer the Big Four but will give you flexibility if you are an early-stage company. Mid-sized audit firms can offer more substantive support if you’re still in the process of establishing your controls and documentation. As discussed, make sure you meet your auditing team and request any specific experience that will be relevant to your books. 

Step 3: Set parameters for working together 

Establish a timeline and communication workflows. Make sure everything funnels through you. Verify how you’ll be sharing files and that your documents will be stored in a secure location. Go over the timeline for when your PBC documents will be ready. 

Step 4: Gather all needed resources and compile essential documents 

You'll need the support of everyone in your organization to complete the audit. Prepare them for the audit by detailing expectations and outcomes.

• Engineers will provide you with details for your IP capitalization and R&D tax credits.
• IT will guide you on IT general controls.
• Marketing and sales will explain the intricacies of sales contracts.
• CX will help you obtain customers’ confirmations.
• HR will provide support for compensation expenses.

Compile all the important documents for the audit. This list will include: 

• Corporate documents, minutes for all board meetings, and significant agreements
• Reconciliation for all accounts with a balance over your internal materiality
• Support for all significant transactions
• List of contingent liabilities
• Revenue recognition memo
• Draft financial statements with notes
• List of subsequent events

Note, your auditors will never tell you the materiality threshold used for the audit, but you can come up with a number that you are comfortable with. Perform an internal review of all accounts and ensure that there are no differences that cannot be reconciled with appropriate support.  

Step 5: Finalize your financial statement

Expect to prepare multiple drafts, reviews, and rewrites of the financial statements. Make sure that the early drafts are reviewed by your executive team and legal counsels and that they are comfortable about the notes related to related parties, contingent liabilities, and subsequent events. If the auditors need to have discussions with certain parties to conclude their testing, make the arrangements needed for these discussions. Again, preparation is key.

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Audits are about building trust

Your relationship with your auditors doesn't need to be adversarial. They're not out to get you. Instead, view auditors as collaborators responsible for validating the key facts in your company’s financial history and ensuring you have a clean bill of health financially. Treat them as critical advisors and partners for your company, and work continuously to establish a trusting partnership.