Five Keys to Preparing for a SaaS Financial Audit

Unless you’re a publicly traded company and required to follow GAAP (generally accepted accounting principles), no one could blame you if you avoided the annual auditing process whenever possible. Financial audits can be painful and time-consuming for all involved.

Technically, private companies may not have to go through an external audit until they’re getting ready to IPO. External financial audits are typically done by outside professional firms that report to shareholders, creditors, lenders, and government entities. But you shouldn’t necessarily wait for an external audit to become a requirement to go through the process.

Internal audits give you a chance to review your company’s financial statements and operational practices. And if you take the right steps, you can tackle common pain points to make the audit process go more smoothly.

Whether you’re looking to kick off another SaaS funding round, you’re getting ready to go public, or you just want to find opportunities to improve operational efficiency, performing financial audits regularly can help you achieve those goals.

What Is a Financial Audit in SaaS?

A financial audit acts as a pulse check on your SaaS business’ accounting records and health. Finance audits can help you demonstrate to tax authorities, as well as other important stakeholders, that your statements and financial activities are fully and honestly reported.

Who Can Carry Out Financial Audits?

There are three standard types of audits. They are carried out by:

• The Internal Revenue Service (IRS). The IRS (official tax collectors in the US) are known to carry out random financial audits, but they also audit businesses with unsatisfactory or unusual financial records.
• Independent auditing firms.  These often third-party audits, guided by audit procedures, are carried out by individuals or boards looking for more specific financial information on a company.
• Internal stakeholders.  Occasionally, internal stakeholders or an audit committee will hire a Certified Public Accountant (CPA) to perform and finalize a financial audit report. This process typically aims to “validate” existing financial statements and accounting standards.
  • Sometimes, stakeholders (or a new CFO) will carry out an audit in search of revenue growth and cost-cutting opportunities.

How to Prepare for a Financial Audit

Many SaaS businesses (and individuals) make the mistake of assuming they’ll never be “unlucky enough” to be on the receiving end of a financial audit. However, they do happen, which is why we’re going to show you how to prepare for a financial audit in five steps.

1. Audit Your SaaS Finances Regularly and Thoroughly

An internal financial audit helps determine the accuracy and efficacy of your company’s recordkeeping and internal controls, which is important information for finance teams, leadership teams, and stakeholders.

Audits put a spotlight on the financial and operational health of your business, show where you can make improvements, and help you determine whether the company complies with any applicable regulations and laws. Financial audits also help ensure the company’s long-term success while avoiding fraud and help them be more prepared for external financial audits.

Although you could audit just once a year, it’s best if you can audit quarterly or at least every six months. And the closer you can get to generally accepted auditing standards, the better.

More frequent auditing allows you to find and address issues sooner than if you wait until the end of the year when it might be harder to find and recall the information you need. For example, say a company found an issue that occurred ten months ago. That’s ten months of compounding problems that you could have dealt with immediately if you had greater visibility.

Ideally, you’d have real-time visibility into your numbers to ensure all data is clean and organized at all times. But, at the very least, performing financial audits quarterly can prevent compounding accounting errors.

Choosing to audit infrequently—or worse, not at all—increases a company’s risk of fraud, data inaccuracies, and incorrect reporting. Setting and documenting clear policies and workflows for your financial reporting processes and ensuring they are well trained on how to adhere to them can help you keep more accurate records.

2. Organize Your Information Before a Financial Audit

Preparing for a financial audit can be painful because of the sheer time and effort it takes to organize your data. Well-stored and organized receipts, invoices, sales contracts, bank statements, balance sheets, cash flow statements, and income statements, among other supporting documents, will go a long way toward making the auditing process more manageable.

Finance teams can’t afford to have data and financial documents scattered across the organizations. If some records are stored on employee machines and data is siloed in point solutions like your CRM, ERP, and HRIS, you risk losing traceability in your financials.

Many cloud-based software systems can be integrated to work together to consolidate financial data and save time, so consider using such features if they’re available. But more importantly, finance has to embrace the idea of an intentional data architecture—a key to automating financial data centralization and maximizing traceability.

3. Clean Up Your Month-End Close

The cleaner your month-end close process is, the smoother any future SaaS financial audit will be. When you automate an appropriate amount of the close process, you can ensure data reconciliation is as accurate and current as possible.

This is especially important for SaaS businesses due to the intricacies of the subscription model, such as subscriptions starting, ending, upgrading, or churning unexpectedly. And it’s especially complex for those that have embraced a usage-based SaaS pricing strategy. It’s not just a single sale like in a retail business, and the longer you wait between reconciliations, the more complex it becomes.

By doing what you can to optimize your reconciliation process, and by doing it frequently, your team will spend less time performing tedious manual work. In turn, this provides them with more time to analyze the results, investigate potential problems, and find solutions that will help your company operate more efficiently.

4. Mitigate Human Error in Your SaaS Financial Audit

Human error is common in data gathering and reconciliation. Any time processes are manual and rely on human hands to complete, the possibility of introducing human error is present. For example, when working in spreadsheets, it can be easy to make copy-paste errors or have misaligned rows or typos that can throw off numerous calculations. Also, version control can become an issue if multiple people work in the same spreadsheet or send it back and forth for revisions.

Teams that prioritize finance function transformation can proactively prepare for financial audits while setting themselves up to be more forward-looking partners in the business. Automating as many accounting procedures as possible (even beyond the month-end close) not only saves your team time and money but also largely reduces the risk of human error while easing many of the pain points of the process.

Additionally, holding regular internal training sessions can help keep your finance team up-to-date on best practices and allow for opportunities for them to cross-train so that you don’t have to rely on a single person to complete specific steps in the process. Team wikis, training documents, and templates for manual tasks can all support these efforts by providing documentation for finance teams to reference on an ongoing basis.

Modernize and Optimize to Take the Pain Out of Preparing for a Financial Audit

Financial audits, when approached with a strategic mindset and using tools like Mosaic, can become manageable. Preparation should be a continuous process, not just a year-end rush. By making sure policies and procedures are kept current, modernizing your processes, and optimizing with automation wherever you’re able to, you can speed up the amount of time it takes to complete your financial audits and reduce risk to the company.

The traceability and data integrity necessary for a financial audit should be table stakes for any business—not something to scramble to figure out when an audit is coming up. A Strategic Finance Platform like Mosaic makes it easier to meet that requirement by creating a connective tissue between all financial data across your organization. It’s the way to automate your “trust but verify” responsibility and proactively prepare for financial audits.

Want to learn how Mosaic can help you create a foundation for data integrity and traceability? Reach out for a personalized demo and find out.