Emerging Companies
When should the board or investors insist on an audit?
- To what extent is non-insider money invested in the business? Do passive investors comprise a large percentage of invested capital?
- Does the board include members that are knowledgeable in accounting and financial matters? At a level where they can/will challenge management?
- Does the board include members that are knowledgeable about the company's industry?
- Does management provides clear, concise, comprehensive and regular financial reports to the board and key constituents?
- Does management presents a "tone of accountability" (i.e., the good and the bad)?
- Are contractual arrangements with customers complex (i.e., multiple deliverables, uncertain or changing terms) such that proper revenue recognition is critical?
- Are contractual arrangements with vendors or suppliers complex such that proper recognition of related obligations is critical?
- Does the company have a variety of equity instruments or classes (common, preferred, options, warrants, etc.) that include outside investors, board members, employees and others where valuation (for grants, sales, redemptions, etc.) is at issue?
- Does the company do business with entities that are owned or controlled by members of management (related party transactions)?
- Are there multiple entities within the company's legal structure resulting in significant intercompany transactions and balances?
- Does the company need to build a track record of financial performance leading to a planned exit strategy where proper and consistent application of accounting principles is critical?
- Has the company's financial performance met expectations of the board (i.e., on budget) or have there been surprises?
- Have management's explanations of financial matters been clear and corroborated with other available data?
- Is there any evidence that management may not be telling the truth?