Many small and mid-sized businesses today are seeking to save money by having their financial statements reviewed instead of audited. Surprisingly, some bankers are allowing the practice.

Although bankers prefer audited financials, which provide greater confidence in how the business is managed, the market for business loans is highly competitive, even in today’s tight-lending environment.

But allowing businesses to have their financial statements reviewed instead of audited can be detrimental to both the bank and the business; banks need to base lending on reliable financial information.

Using audited financials can provide many benefits to the business owner, including a potential increase in the size of the loan and the leverage ratio. Access to more capital can support organic growth or enable a business to make an acquisition.

With audited financials, the banker will also have a better understanding of the business, which can result in a closer relationship. The more knowledge the banker has of the business and its financials, the better the banker can anticipate the needs of the business and recommend additional services.

We also encourage clients to communicate frequently with their bankers to update them on financial performance, business operations, mergers and acquisitions strategy and projected growth rates. Bankers hate surprises; letting them know early about issues is key to maintaining a strong relationship. Audited financials help, as the audit process trains the internal finance team to accurately close the books on a monthly basis. The finance team will also have a better understanding of upcoming changes in accounting rules.

Impact On Business Value

Failure to audit financials can also reduce the value of a business. That’s especially important if the business is positioning itself to be sold, if it is seeking private equity or venture capital, or if it plans to go public.

Based on due diligence analysis for private equity and strategic buyers on over 200 middle market transactions, businesses that present reviewed financial statements have significantly more negative adjustments to earnings than companies with audited financials.

There are other benefits to auditing financial statements, including:

• Encouraging financial discipline. Audits are based on best practices and compliance with current accounting standards.
• Deterring fraud. While audits are not designed to detect fraud, having auditors examine financial records will likely cause would-be wrongdoers to think twice.
• Comforting stakeholders. Everyone from the banker to the board of directors can take comfort in knowing that financials have been examined closely.
• Identifying ways to improve the business. An audit can provide ideas for: improving internal controls; developing key financial metric reporting, succession or M&A planning; minimizing taxes; expanding internationally; improving operations and revising employee incentive plans.

Reviewing financial statements may save money today, but can cost the business a great deal long term.

George D. Shaw is a partner at DiCicco, Gulman & Co. in Woburn.  Email: gshaw@dgccpa.com.