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The Securities and Exchange Commission (SEC) requires public companies to submit quarterly and annual financial statements; depending on the particular circumstances. Private companies, on the other hand, aren't mandated by the SEC to conduct financial audits. However, annual financial audits are a regular part of doing business for many private companies. And many investors require later-stage startups to provide audited financials as part of their investment agreement. Financial statement audits ensure transparency, compliance, and trust in your company's financial reporting. 

When should you start considering an audit? Typically, after a Series A funding round, accounting requirements become more complex. Investors might pressure companies to report their financials-including stock-based compensation expenses-in accordance with GAAP. Key triggers for financial audits include investor requirements, preparation for an IPO, or lender requirements. Most companies get their financials audited annually, usually in the quarter after the fiscal year ends.

Preparing for your first financial audit can feel overwhelming, especially if you haven't gone through one before. Here are a few steps to help you prepare:

1. Calculate Stock-Based Compensation Expenses: According to ASC 718, U.S. companies must disclose stock-based compensation expenses in their annual income statement. Carta's Financial Reporting service can calculate your SBC expenses using your cap table data, along with offering 1:1 audit support from our financial reporting experts.

2. Hire an Auditor: Choose a well-regarded certified public accountant (CPA) with experience auditing private companies. Working with an auditor recommended by your investors can also be beneficial.

3. Organize Documentation: Compile necessary documents as listed in the PBC (Prepared By Client list) from your auditor. Ensure your cap table is up to date, and use Carta's Health Checks to identify any outstanding steps before handing over documentation.

4. Update Your Financial Reporting Value (FRV): Verify you are using the most recent FRV to calculate stock-based compensation expenses. This can usually be found in the 409A Valuations section of Carta.

5. Prepare Financial Reports: Gather the financial reports your auditor needs, as outlined in the PBC list. You may need to provide statements from both the current and previous fiscal years.

To make the process smoother, Carta is now offering Standard Financial Reporting to all accounts, providing users with access to their financial audit information. You can also download Carta's "First Audit Checklist," a PDF that outlines what you need to prepare for your first audit.

Check out our release notes for more information about our Standard Financial Reporting tool and how it can help streamline your audit preparation.

Would love to hear your thoughts and experiences on financial audits. How did you handle your first audit, and what advice would you give to other founders preparing for theirs?