Audits . . . 

are methodical reviews by a disinterested third party of a company's accounts or, more generally, its financial situation. They are usually conducted by independent accounting firms. Most later-stage venture backed companies have audited financials.

Few venture capitalists, however, expect a new company to have audited financial statements. Audits are expensive, and some early stage investors believe a young company's money is better spent in other areas. This is not to say, however, that investors do not expect a company's books to be complete and accurate. They do. They also expect companies to have financial reporting systems that report regularly on those business matters that are important to the company’s success.

Venture capital investors usually examine a company's books and records thoroughly before they invest. Most of them also interview a company's internal accountants and outside accounting firm. They also routinely check behind a company's books by calling suppliers and creditors. In their financial statement reviews, they look for accurate and timely information they can use to evaluate the company’s prospects. Often, working with an outside accountant can help a company improve its reporting and enhance management’s ability to run the business and attract capital.

When a company plans to go public in the future, it is wise for it to have audits conducted or, at least, to have independent certified public accountants verify the company's yearly inventories. This is because companies are usually required to disclose three years of audited financial statements in their initial public offerings. Sometimes only two years are required for limited offerings and, of course, a company that has been in existence for less than three years can only provide financial statements for the period it has been in business.

The audits required by initial public offerings can sometimes be performed just beforehand, but this can delay the offering and result in unexpected changes to the offering documents when the independent accountants apply their procedures to make the company's statements comply with the requirements of the Securities and Exchange Commission.

When a company plans to go public, the safer, and often cheaper, course of action is to engage an independent accountant to conduct audits on a regular basis. Most accountants will take this opportunity to get to know the company better and suggest reporting mechanisms that can help management run the company more efficiently. Also, they will prepare statements that comply with the requirements of the Securities and Exchange Commission so that the company can move more quickly to consummate a public offering. At the same time, they can help management organize other records, such as reports on industry segments, to fit the disclosure requirements of initial public offerings. While audits may seem expensive for a young company, having an independent CPA oversee and review the company's books may reduce the time and cost of having the audit done at a later date. See: CPAs (Certified Public Accountants), Due Diligence, Going Public, IPOs (Initial Public Offerings), Reports and Records.