KCI Auto Auction needed a loan to build a new facility to accommodate its growth.

“We didn’t know what it meant to have to audit our financial statements when we took out the financing because we had never done that before,” Assistant General Manager Steve Goettling said. “We did some digging on costs, and until then, we didn’t realize how much.”

The company soon discovered that an annual audit potentially could cost between $15,000 and $25,000 — the result of more strict financial reporting requirements from regulators’ heightened scrutiny of banks.

But KCI Auto Auction also found an alternative that can save companies money and leave lenders satisfied.

“We’re still a small business, so that amount for an undertaking like an audit is a huge amount to our expense line,” Goettling said. “Anything we could save on that would help our bottom line and would be the difference in our ability to improve our benefits to hire high-quality people or invest in new equipment.”

Company representatives visited with several accounting firms, but Goettling said Marks Nelson Vohland Campbell Radetic LLC was the only one to suggest a less costly option than an audit.

“If the bank is requiring an audit and the client has never had an audit before, we are talking to the bank about what are the real areas they are trying to focus on with the audit,” said Angie McElhaney, a CPA with Marks Nelson. “What are you trying to get out of the audit? Because we think you could probably settle on a review — with some extra agreed-upon procedures — to reduce the costs to the client.”

Marks Nelson interceded with the bank on KCI Auto Auction’s behalf, and the result was a 30 percent to 40 percent cost savings over performing an audit.

“Everybody won,” Goettling said. “Marks Nelson gained, hopefully, a long-term customer in us. The financial institution got what they needed as far as appeasing their loan requirements. We saved money. It’s a good example of getting together and finding common ground where everyone is helped out.”

Mark Radetic, a managing partner at Marks Nelson, said banks often are more willing to negotiate down from an audit with a CPA involved.

“Banks are trying to protect themselves, too, so they are going to ask for as much as possible,” Radetic said. “What happens when we’re not involved and a client speaks directly to the financial institution is sometimes there is almost a panic in terms of they need a line of credit and will do whatever they are being told in order to maintain the relationship. But everyone automatically feels more comfortable when a CPA is involved.”

Jack Sutherland, regional president of Equity Bank, said independent CPA firms place their reputation on the line. So bankers feel more comfortable about financial statements that involve CPAs, especially during a challenging economy filled with struggling companies.

“Accounting firms are professionals and not about to put their name on something they are not comfortable with,” Sutherland said. “So we work with accounting firms all the time and solicit their business to work with clients. It’s a way of getting around requiring an audit from everyone.”

Sutherland said banks still are going to require audits from some companies because the less costly review doesn’t fit every situation.

“Some businesses are also more complicated than others,” Sutherland said. “Some are very straightforward, and all they do is make a widget and sell it. Others are international companies with multiple subsidiaries, and it quickly gets complicated on how funds flow from one entity to another. The more difficult the business model, a simple rule of thumb is that it will require a more complex accounting statement.”

Bret Rolig, senior vice president of commercial lending at Enterprise Bank, said business owners shouldn’t view a third-party review as a benefit only for the bank.

“Having an outside review or audit can be helpful down the road when they are looking to sell the company,” Rolig said. “It also gives a potential buyer some comfort in the historical numbers you are providing as opposed to a company that just turned in internal numbers through the years.”

Radetic said a good CPA also should see an audit or a review as more than just paperwork to turn over before they shake hands and say see you next year.

“A good CPA will take this as a tool to help a client with some recommendations on where you could be more efficient or where you could increase your profitability,” Radetic said. “It becomes a consulting tool as opposed to just a compliance tool.”

WHAT THEY LOOK FOR

Bankers’ main interest in studying financial statements is to ensure that a client has the ability to repay its loans. Here are a few examples of things bankers look at in a financial statement:

•  Does the balance sheet actually balance?
“Believe it or not, we occasionally get a statement that doesn’t balance out, and then we don’t trust any of the numbers because something is out of sync,” said Jack Sutherland, regional president of Equity Bank.

• If a bank lends a business $1 million, is it properly accounted as a liability? If it’s accounted as a $500,000 liability, why doesn’t the business know its balance?

• A comparison of turnover for accounts receivable to turnover of inventory to see whether inventory is stale or customers are paying slower.

• How past due are receivables? Is it more than 90 days?

• Are accounts payable growing? Basically, does the business have enough cash flow to pay its bills on time, or is it relying heavily on vendors to pay them?

• Banks compare the current financial statement to previous statements to see whether the company is doing better, worse or the same.

THREE LEVELS OF ASSURANCE

Accountants offer banks three basic levels of assurance but also can mix in extra agreed-on procedures that focus on specific areas a bank is interested in.

Audit: An audit is the highest level of assurance. A CPA will perform a risk assessment and then customize an audit to hit target areas of financial statements that are most likely to be misstated. The CPA will do an independent verification of all numbers.

Review: This is a moderate level of assurance. A CPA will ask the nature of certain accounts but stop there, not testing support for the numbers. A CPA performs certain analytical procedures, such as comparing accounts receivables to sales, and if there is a variance, a CPA will conduct inquiries.

Compilation: This is the lowest level of financial report. This basically involves the client submitting its internal financial report to the bank. If a CPA firm is involved, the only thing it will do is look for very obvious errors, such as a negative inventory number. This typically is reserved only for very small private companies or is used as a monthly or quarterly report, in association with an annual review or audit.

jdornbrook@bizjournals.com | 816-777-2215