So, you’re about to merge with another company. What’s next? The integration process typically starts with audited financial statements that reflect the results and financial position of the combined entity. This exercise requires a close partnership between the external M&A audit team and in-house accounting personnel from both companies. Collaboration is key to a seamless transition. But, you may wonder how to do an audit that best supports your specific transition.
Luckily, GBQ has experience with M&A audits and offers bits of information to highlight its importance. Here’s what to know about audit procedures for mergers and acquisitions.
Why Are Audits Important?
Audits play a pivotal role in the context of mergers and acquisitions (M&A) due to their inherent significance in assessing the financial health, risks, and overall viability of the target company.
By subjecting the target company’s financial statements, operations, and internal controls to a rigorous examination, audits provide the acquiring firm with a comprehensive understanding of potential liabilities, inaccuracies, and undisclosed issues. This knowledge is crucial for making informed decisions and negotiations during the M&A process. Audits help identify discrepancies between reported figures and the actual financial state, ensuring transparency and accountability in the deal.
Moreover, audits facilitate the identification of intangible assets and potential synergies, aiding in the accurate valuation of the target company. Overall, audits serve as a safeguard against hidden pitfalls and uncertainties, contributing to successful M&A transactions and post-deal integration.
Prepare the M&A Audit Team
It’s important to notify your audit team about M&A plans long before a transaction takes place — even if there’s still a chance the deal might fall through. This gives the audit team time to pull specialists together who can help you generate timely, accurate post-acquisition financial statements. Establishing the internal audit role in mergers and acquisitions is critical for all team members to understand.
For example, you’ll need someone with experience applying the business combination rules under U.S. Generally Accepted Accounting Principles (GAAP) and tax experts who know the rules for reporting different types of deal structures under today’s federal and state tax rules. Likewise, if you’re acquiring a company that uses different accounting systems, you’ll need someone who’s familiar with the acquired company’s software, especially if it’s no longer supported by the vendor.
Anticipate Auditor Needs
Even if your team of specialists has been assembled in advance, once you’ve merged, expect audit fieldwork to take more time than usual. The auditors will review documents associated with the merger, such as due diligence workpapers and legal documents governing the purchase. They’ll also ask to review prior financial statements and audit reports for the acquired company.
The audit partner might even ask to review board minutes discussing the acquisition, as well as minutes from meetings conducted by the team responsible for the integration of the newly acquired entity.
Documents don’t tell the full story, however. The audit team will interview key members of your team, such as accounting personnel and members of the due diligence team. To streamline the process, designate an employee to serve as the audit liaison. He or she will be the primary point of contact to gather your auditor’s requests for information and access to company employees and executives.
Rely On Professionals for Assistance
M&As provide opportunities to enhance your company’s value. But it’s hard to gauge the relative success of a transaction without reliable, timely financial statements. An M&A audit can help you allocate the purchase price to acquired assets and liabilities and otherwise report combined financial results in accordance with U.S. GAAP.