Audit standards for private companies generally track those of publicly listed companies, with a valuable (and time-saving) exception. The reporting requirements of private companies are (all things considered) a bit less stringent and demanding than those for publicly listed firms. One of the many key benefits to your organization being privately owned is that your company won’t have financial reporting requirements by the SEC (the Securities and Exchange Commission) – a fact that can save your business a great deal of time, money, and worry.
That said, your privately owned company still must adhere to certain financial audit requirements when an audit is required by lenders, insurance companies and other agencies. In this post, the accounting and business audit experts at DHJJ provide our privately owned business clients with an overview of some of the key items we adhere to in our work with private firms. Read on to learn more.
Do Private and Public Companies Go Through the Same Financial Audit?
In a word, no – private and public companies do not go through the same financial audit. While public companies are required to be audited by the SEC, private companies who do not have publicly traded debt or equity do not have any legal requirement for the public disclosure of their financial statements, nor must they undergo any audit of their financial statements.
However, audits of privately owned companies may be required by lending banks, bonding companies, insurance companies or preferences by private company owners. Both private and public firms are both required to follow GAAP, or “generally accepted accounting principles.”
While “minding the GAAP” is required of public corporations by the SEC, privately owned corporations must also adhere to generally accepted accounting principles in order to meet the expectations of other entities they interact with (for example, insurance companies and lenders).
Financial Audit Requirements for Private Companies
Since the SEC does not mandate the audit of privately owned companies, private companies have a greater degree of flexibility in year end reporting. When an audit is not required, many privately owned companies will opt to have their financial statements undergo a review engagement (offering limited assurance) or a compilation (offering no assurance). These types of reporting can also be dictated by lenders, insurance companies and other agencies. When an audit is required for a private company, the audit will be conducted under GAAS (generally accepted auditing standards) as promulgated by the AICPA governing body. Audits for public companies are conducted under the PCAOB (public company accounting oversight board) standards as established by Congress with oversight by the SEC. While GAAS follows PCAOB standards, an audit conducted under GAAS will generally not be as exhaustive as one conducted under the PCAOB.
What are GAAP Requirements?
Private companies should adhere to GAAP requirements. GAAP requirements are designed by both the SEC and the FASB jointly in order to establish a shared “financial language” for U.S. companies. Although overseas companies or foreign-owned companies have their own reporting standards, GAAP is overall, globally recognized.
As discussed previously, GAAP requirements are a set of generally accepted principles of accounting that help your organization speak the same financial language as the other entities the firm interacts with, especially those in the financial industry. Lenders typically require an audit of your financial statements before working with private companies, so getting on the right page definitely helps this process go smoothly. GAAP requirements also ensure continuity between your organization and other organizations, and can provide you with an easy transition from one CFO or accountant or outsourced financial services provider to the next, should that happen within your firm.
How DHJJ Can Help
Need a hand with your private company’s financials? Meet DHJJ: your partner for experience and expertise regarding private financial audits.
Small businesses have enough on their plates without worrying about the particulars of their financial statements. Our experts take the stress out of your company’s financials, so you can focus on doing what you do best. At DHJJ, our renowned business advisory and tax specialists are happy to help you succeed.
DHJJ’s experienced team of CPAs is excited to offer business advisory, accounting, audit, and tax services (and more) to organizations across many industries. If your greater Chicago-area company is considering partnering with a financial advisory firm, contact us online or give us a call at (630) 420 1360 to see how we can help.