Founder Education

How to prepare for a financial audit

12 December 2023
Jaron Wright

As companies grow, they will need to start considering whether and when to begin engaging an external auditor to audit their financials. Why and when your company gets audited depends on its growth trajectory and finances. The Securities and Exchange Commission (SEC) requires public companies to submit quarterly and annual financial statements; depending on the particular circumstances, your own company’s requirements may be more rigid. 

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. 

This comprehensive guide covers everything you need to know to tackle your financial audit with confidence.

What is a financial audit?

A financial audit is a third-party evaluation of your company’s financial statements to assure investors, regulators, and other outside parties that your reported values are complete and accurate. 

Depending on your company’s financial goals and growth, you may want an independent audit to:

  • Appeal to outside investors and gain their trust

  • Satisfy a requirement from an insurance company

  • Get a loan from a bank

Financial audits are typically conducted annually.  A third-party accountant (an auditor) reviews the accounting practices and financial statements of your company and determines one of three  outcomes:

  • Unqualified opinion (clean opinion): Your company has represented its financial operations correctly

  • Qualified opinion: Your company’s accounting practices contain significant errors

  • Adverse opinion: Your financial records are not aligned with GAAP (generally accepted accounting principles) and are egregiously misstated

  • Disclaimer of opinion: The auditor was unable to complete the report because of insufficient financial statements or a lack of cooperation from the company

What triggers financial audits? 

When a company is first incorporated, it can operate for some time with less complex bookkeeping. At this stage, startup accounting is mostly about tracking company progress and estimating cash burn rate

After a Series A funding, accounting requirements get much more complicated. Investors might start pressuring companies to report out their financials—including their stock-based compensation expenses—in accordance with GAAP. Investors want to ensure your financials are trustworthy, and that your company is prepared for its next preferred round or an exit.

For companies that have raised at least a Series A, the need to start financial audits may be triggered by a few events: 

Most companies get their financials audited on an annual basis, typically the quarter after year end for the prior fiscal year’s financials (Q1 if your fiscal year ends on December 31). 

Financial audit checklist: How to prepare

When time comes for your company to undergo a financial audit, there are a few things you can do in advance to make the process as smooth as possible.

Calculate your stock-based compensation expenses

Standard accounting guidance ASC 718 requires U.S. companies to disclose their stock-based compensation (SBC) expenses, as well as the method used to calculate that figure, in their annual income statement. 

The ASC 718 guidelines include three basic steps for expensing employee-stock-based compensation: 

  • Calculate the fair value of the equity compensation

  • Allocate the expense over the option’s useful economic life

  • Reflect compensation expenses on your income statement

Carta’s Financial Reporting service uses your cap table data to calculate your company’s SBC expenses in minutes, along with access to  1:1 audit support from our team of financial reporting experts. 

Hire an auditor

The next step is to hire a third-party auditor, preferably a well-regarded certified public accountant from a firm that has experience auditing private companies. If it’s your first financial audit, you may want to work with an auditor that’s recommended by your investors.   

Organize your documentation

Once you’ve hired an auditor, the next step is to compile your documentation. You will be emailed a document called a PBC (Prepared By Client list). This is a list of documents your auditor will need to review. 

For many companies, this includes making sure your cap table is up to date. Take this opportunity to add any new options you’ve issued to employees, and update your terminations and cancellations of options not exercised by departing employees. 

You can use the Health Checks on your Carta account to identify any steps to take before handing over your documentation. 

Update your Financial Reporting Value

Before you can add your stock-based compensation expenses to your income statement, verify you are using the most recent Financial Reporting Value (FRV)  to calculate the expense. 

Historically, Carta Financial Reporting clients have input the company’s fair market value (FMV) to calculate stock-based compensation expense using  a 409A valuation. In most cases this is the most appropriate input for FRV, however in some cases there is a specific FRV delivered by Carta in order to support the accurate application of diverging tax regulatory guidelines 409A and GAAP (ASC 718). The Carta Valuation Team can answer any questions you have.

Your input for FRV can be found on the 409A Valuations section of Carta (under the Compliance & Tax section). If you do not yet have an FRV or need to update your current valuation in Carta, you can request to do so here

Prepare financial reports for your auditor

Now that your equity data is up to date, it’s time to prepare financial reports for your auditor to review. Review your PBC list to learn what information the auditor needs to draft their opinion. You may need to share statements from both your current fiscal year and the previous fiscal year. 

Financial audit best practices 

Now that you know how to prepare for a financial audit, let’s go over some best practices to keep in mind throughout the process. 

Keep a good relationship with your auditor 

Interacting with auditors professionally is crucial. Ask them what they need early in the process. Treat them as partners, and maintain a cooperative relationship throughout the audit. 

Once you are set up on Carta’s Financial Reporting, share the 2023 Auditors Guide with your auditor. 

Keep good records  

Update your cap table monthly. This includes adding any newly issued options, updating your list of stakeholders, and entering any employee terminations or security cancellations promptly. 

How Carta can help 

Set up time with a Carta Financial Reporting analyst to get set up. To schedule time with a Financial Reporting analyst, email

Carta regularly  builds new features to help you stay compliant. As we get ready for year end, here is an overview of the recent additions. 

Equity awards with performance conditions

If an award has a performance condition, it means that the award has a vesting condition that is subject to performance-based criteria. Carta Financial Reporting now supports awards with non-market performance conditions (including event-based). When expensing securities with non-market performance conditions, you will be asked to provide an estimated probability that the condition will be met. 

Deferred Tax Asset

Deferred Tax Asset (DTA) is a line item on a company’s balance sheet that may reduce its taxable income in the future. DTA is now available for all Carta Financial Reporting customers. Generate and download a Min. Disclosure report today to see the Deferred Tax Asset (DTA)  tab. Your reporting period must start on or after September 1, 2023. ISO/NSO splits and multiple common share classes are not supported at this time. 

Modification accounting support

Did you make modifications to any securities this year? A modification includes, but is not limited to, a repricing or a vesting schedule change. The Carta team can help with your accounting and reporting approach.

Repricing means you are changing (usually lowering) the strike price on a historic grant. This is already supported in Carta.

We are also offering services for vesting schedule modifications (such as accelerations)  and exercise window extensions. These modifications are most common for companies that are experiencing a layoff. 

If you would like to learn more about this service, email us at

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