U.S. corporate acquisitions: audit

In the U.S., there is a statutory audit requirement only for public companies (those listed on the stock exchanges or otherwise subject to SEC regulation by virtue of number of shareholders). Only Certified Public Accountants (“CPA’s”) may audit financial statements of any U.S. company; CPA’s are subject to licensing requirements and oversight by the states and to supervisory requirements (“peer review”) by professional societies.

Depending on the situation, the target’s entire balance sheet and operations or just key areas will be audited. For example, if the target has had regular audits by independent CPA’s, it may be possible to review their work-papers as of the latest year-end and to rely on their findings for many aspects. In certain situations, even if a company has not been audited, it may be possible to limit auditing work to material items; for example, in the case of a retailer which also manufactures its products, accounts receivable should not be significant enough to be audited whereas inventory will undoubtedly require much audit work.

The decision of how much auditing to do will be based on how much reliable financial information is available and will also be based on having a complete understanding of the business and its operating cycles.

It should be noted that audits of all types have inherent limitations; auditors rely on auditees to provide accurate and complete information and may not detect willful omissions of important material. For example non-disclosure of transactions with affiliated parties may hide negative trends in normal third-party business. Accordingly, it is important to allow sufficient time for the exploration of such issues and also to obtain the seller’s cooperation by making them responsible for the accuracy and completeness of all financial data provided to the buyer; this can be accomplished in the warranties area of the contract and by having sufficient funds held back to cover the post-closing discovery of adjustments and errors.

The costs of audits will likely range between 1% and 2% of the purchase price for a limited audit and 2% to 4% for a full audit.

DISCLAIMER

The information provided here and on the other pages linked hereto is intended for educational purposes only, and is not legal advice. Particular situations require particular analyses that can only be provided by legal and/or accounting professionals who specialize in the relevant fields and who know all the details of a situation. Also, a presentation such as this does not establish the attorney and/or CPA-client relationship that is necessary in any rendering of legal or other professional advice. Finally, one should be aware that the law is a chameleon-like beast that changes its colors frequently, and what holds good today may be reversed by tomorrow. The comments herein should then be read in that light.

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Limited audit or full audit

4.1 Limited audit or full audit