Key steps for private equity portfolio companies to drive audit efficiency

An efficient audit process is crucial to delivering timely audited financial statements and tax reporting, while also maintaining strong relationships with lenders, investors, and other stakeholders.

However, many portfolio companies (portcos) enter the audit process unprepared, resulting in delays, cost overruns, and missed deadlines. By taking a proactive approach to audit readiness, portcos can avoid common, avoidable pitfalls, including:

1. Understaffed Teams

Limited resources to manage both daily operations and audit demands leads to errors and delays in fulfilling audit requests.

2. Inadequate Closing Procedures

Inefficient closing processes often result in inaccurate or disorganized financial records, further delaying the audit process.

3. Lack of In-House Technical Expertise

Many portcos lack the necessary bench strength to handle complex accounting topics like business combinations, contingent consideration, debt modifications, stock-based compensation, and consolidations.

4. Insufficient Documentation for Key Audit Areas

Missing or incomplete documentation for balance sheet accounts, discrepancies with the general ledger, inaccurate or nonexistent account roll-forwards, and inadequate documentation or improper positions under Generally Accepted Accounting Principles (GAAP).

5. Disconnect Between Accounting and Deal Teams

Poor coordination and lack of support for acquisitions can delay reporting and hinder audit progress.

Audit Readiness Strategies for Portfolio Companies

Adopting the right audit preparation practices can help portfolio companies approach the process with greater confidence. The following six strategies are designed to reduce delays, lower costs, and improve the overall audit experience:

1. Start Early and Communicate Often

Engage with the audit firm well in advance of the audit to discuss timelines, scope, focus areas, and expectations. Develop a detailed audit roadmap, including key milestones and routine check-ins to assess progress, address roadblocks, and keep everyone aligned.

2. Develop a Structured Closing Checklist

A comprehensive closing checklist helps avoid last-minute surprises. Include items such as:

• Reviewing all transactions for completeness and accuracy
• Verifying that all journal entries are posted correctly
• Preparing reconciliations for bank accounts, accounts receivable, accounts payable, and other accounts
• Completing roll-forwards for goodwill, fixed assets, debt, and equity
• Eliminating all intercompany transactions
• Assembling key agreements (e.g. revenue, leases, debt, equity) and documentation for any accruals, reserves, or contingencies
• Updating tax-related matters (e.g., deferred taxes, tax provisions)

3. Prepare Easy-to-Follow Support

All support should be well organized, easily accessible, include necessary checks, and provide clear explanations for significant fluctuations and/or unusual items. Well-documented records that are rooted in source documents allows auditors to validate balances and transaction faster with less back and forth.

4. Assign Roles and Responsibilities

Define and assign specific roles and responsibilities for each audit area for accountability. Establish internal review processes before submission and set up clear communication protocols with the audit firm. Help team members across departments (finance, legal, operations) understand the importance of the audit, their specific responsibilities, and deadlines. This can prevent potential issues and bottlenecks, streamline audit requests, and support timely issue resolution.

5. Leverage Technology

Utilize tools or software that automates, organizes, and/or streamlines data management, document tracking, and communication with the audit firm. Create a structure that supports both management and compliance reporting, including chart of accounts, addback flagging/tracking, audit-to-compliance bridging. Together, technology and a well-designed structure can reduce administrative overhead, increase efficiency, and improve transparency.

6. Implement continuous training.

Train teams on the audit process, compliance requirements, common audit adjustments, and industry best practices. Build muscle memory by incorporating audit-focuses practices into month- and quarter-end closings to speed up the audit process, prevent mistakes, and maintain compliance year-round.

We Can Help

At Elliott Davis, we specialize in helping private equity firms and portfolio companies through the audit process. Contact us today to learn how we can help you streamline your audit process and ease the burden to deliver timely audited financial statements and tax reporting to lenders, investors, and other stakeholders.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.