20 Reasons a Private Company Needs an Audit

1. Regulation A+ Tier 2 offerings require audited financials. Tier 2 issuers must include audited financial statements in their offering circular, prepared under U.S. GAAS (or PCAOB standards, but you do not need this if you're a privately held company; publicly traded companies are allowed to raise under Reg A+ and would need PCAOB audits!). Tier 1 offerings do not require an audit unless you already have one for other purposes.

2. Equity crowdfunding scales the requirement with the raise. Under Regulation Crowdfunding, offerings above $618,000 need audited statements, with a reviewed-statement exception for first-time issuers raising up to $1,235,000. Repeat issuers, and first-timers above that amount, need an audit. The rule text in the eCFR also says an audit report with a qualified or adverse opinion does not satisfy the requirement.

3. Venture and growth investors expect clean books. Term sheets often make audited financials a condition of closing or of a later round. Having them ready removes a delay.

4. Franchisors need audited statements for the FDD. Item 21 requires audited financial statements for the most recent three fiscal years. Start-up franchisors can phase in the audit over their first three years, but the FTC expects audited statements as soon as practical.

5. Some licenses and regulated activities require audits. Applications in areas such as lending, money transmission, and insurance often ask for audited statements. Check your state's requirements early.

6. Securities exemptions come with financial reporting conditions. Whichever exemption you choose, read its reporting requirements before you plan the raise. Finding out mid-offering is expensive.

7. Lenders ask for them. Banks frequently write audited or reviewed statements into loan covenants. Meeting that requirement is cheaper than negotiating a waiver.

8. Better financial reporting can support better terms. A lender that trusts your numbers has less reason to price in uncertainty.

9. Surety and bonding companies rely on them. Contractors often need audited statements to raise bonding capacity.

10. Suppliers extend credit on the strength of your reporting. Vendors who cannot see inside your business are more willing to offer terms when an independent CPA has examined your results.

11. Buyers discount what they cannot verify. Unaudited numbers invite a larger haircut or a bigger escrow. Audited statements narrow the argument. The AICPA notes that audits are typically appropriate, and often required, when you are seeking outside investors, selling a business, or considering a merger.

12. Due diligence moves faster. An audit trail answers many diligence questions before they are asked, which shortens timelines and reduces the chance of a deal dying in the middle.

13. A quality of earnings report builds on audited work. Buyers commonly commission one. A prior audit gives that analysis a firmer base.

14. Valuation conversations rest on credible numbers. Revenue recognition, inventory, and adjusted EBITDA are the usual battlegrounds. An auditor has already tested them.

15. Earnout and purchase price adjustments need an agreed set of numbers. Audited statements are a neutral reference when the parties later disagree.

16. Audits find errors and control weaknesses early. Misclassified revenue, missing accruals, and weak approval processes are cheaper to fix when your auditor finds them than when a buyer or regulator does. An audit requires the CPA to understand your internal controls and assess fraud risk, which a review and a compilation do not.

17. The management letter is a free to-do list. Auditors report control deficiencies and recommend fixes, which you can act on before they become losses.

18. They deter fraud. Knowing that an independent party will test transactions changes behavior. Segregation of duties tends to improve after the first audit.

19. Owners and boards get information they can trust. Partners, minority shareholders, and board members outside day-to-day operations can rely on the statements without taking management's word for it.

20. You are ready for the next stage before it arrives. Whether the next stage is a Reg A+ raise, a sale, or a franchise program, a company with a track record of audited statements can move when the opportunity appears.

The AICPA's guide to financial statement services compares all three side by side. If a third party demands one, ask them in writing which level and which standards they require before you hire anyone.

You may never be required to get an audit by statute. You will probably meet someone who requires one. Having audited statements in hand turns that meeting from a delay into a formality.

If you are weighing an audit for a raise, a franchise filing, a license application, or a sale, Alice.CPA works with private companies on exactly these situations.