Private equity checklist for selecting an auditor

Private equity checklist for selecting an auditor

To select the best external auditor for their portfolio companies, private equity groups should refine their evaluation criteria and process.

After acquiring a new portfolio company, private equity groups (PEGs) begin the crucial task of choosing an external auditor. A strong selection can support company growth and value creation. But a weaker choice risks lower audit quality and financial reporting errors that could complicate the exit process and cause buyers to turn away from a deal.

How can PEGs choose an auditor that is the best fit for a given portfolio company? PEGs should make this decision carefully by considering all the factors unique to the portfolio company as well as collaborating closely with the portfolio company’s management. This checklist can help by defining critical auditor qualities to consider and listing the core elements to create an efficient, replicable selection process.

Choosing the wrong auditor isn’t the only barrier to a seamless exit process. Avoid these four common exit strategy errors.

Evaluate each auditor’s qualities

PEGs should assess each potential auditor across these categories:

  1. Private equity knowledge. Auditors should have ample experience working with PEGs and strong knowledge of private equity transactions including acquisition accounting.
  • How many PEGs and portfolio companies has the auditor worked with?
  • Does the auditor understand the intricacies of typical portfolio company transactions?
  1. Industry specialization. Auditors with deep experience in the portfolio company’s industry can get up to speed quickly with minimal training, to provide value and save time.
  • Does the auditor have experience in the portfolio company’s industry (for example, technology, manufacturing, healthcare) and with similar companies within that industry?
  • Can the auditor describe the financial reporting keys to success in this industry or articulate industry specifics to support audit quality or create efficiencies in the audit process?
  1. Reputation. A national audit firm with a strong reputation can lend credibility to the portfolio company and increase trust among potential buyers.
  • Does the auditor have a national presence and the staffing, technology, and resources to meet the portfolio company’s audit needs?
  • Does the auditor have a positive reputation? What are its known strengths?
  1. Customized approach. A one-size-fits-all approach to external audits can lead to inefficiencies and missed opportunities.
  • Does the auditor employ a customized approach based on the portfolio company’s size, industry, complexity, and risk?
  1. Ability to add value. Informed by deep expertise in the industry, auditors might be able to share best practices and opportunities for improvement.
  • What are the major challenges and opportunities in the industry today?
  • What business process inefficiencies are common for the industry and company size?

Develop a consistent, replicable selection process

Because PEGs and portfolio company management select new auditors frequently, they should create a repeatable internal process to improve efficiency and outcomes. Consider adding these process elements:

  1. List of pre-vetted auditors. To avoid a time-consuming search for new auditors at every acquisition, PEGs can create a list of preselected auditors for portfolio company management, featuring their contact information, industry specializations, and more.
  2. Checklist of selection and evaluation steps. To know what to expect and avoid surprises, PEGs should create consistent steps for auditor selection and evaluation that PEG staff and management can follow.
  3. Checklist of evaluation criteria. See the auditor qualities mentioned previously for consistent evaluation criteria.
  4. Preassembled proposal documents. PEGs should prepare in advance all relevant documents to send as a package to potential auditors (for example, financial statements, capitalization table, debt agreement) rather than waiting for the auditor to provide its request list.
  5. Standardized communication. PEGs should create consistent communication protocols with potential auditors, detailing how they’ll provide updates, share documents, and sign nondisclosure agreements.
  6. Checklist of auditor onboarding steps. To streamline orientation, PEGs should map out steps in the typical onboarding process.

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