This engagement is anonymized to protect client confidentiality. Clarity Tax & CPAs is a PCAOB-registered, peer-reviewed firm.
Client Snapshot
- Industry
- Manufacturing & distribution (industrial components)
- Size
- $11.4M in annual revenue; 47 employees
- Location
- Great Lakes region (anonymized)
- Engagement type
- GAAS financial statement audit for lender and prospective buyer due diligence
The Challenge
A family-owned industrial components manufacturer was in active discussions with a private equity group about a partial acquisition. The PE firm required three years of audited financials as a condition of proceeding to letter of intent. The company had used the same local CPA for fifteen years, primarily for tax returns and annual reviews, and had no audit history.
A preliminary review of the books surfaced two issues immediately: inventory was being valued using a hybrid LIFO and average-cost method that had never been formally documented or consistently applied, and the company had been capitalizing certain repair and maintenance expenditures that should have been expensed under GAAP. These issues had accumulated across multiple years and would require retroactive correction.
What We Did
- Performed a pre-audit diagnostic to scope the inventory valuation and capitalization issues before fieldwork, which let us establish the correction approach and timeline with management upfront.
- Worked with the controller to restate the prior two years under a consistently applied weighted-average cost method, accounting for the change as a correction of an error under ASC 250. Audit opinions for all three years were issued on the restated figures.
- Identified and reclassified $212,000 in improperly capitalized maintenance costs across the two restatement years, with the net effect reflected in restated retained earnings.
- Issued unmodified audit opinions for all three years. The financial statement package included explanatory notes on the nature and effect of the restatements, drafted with enough detail to satisfy the PE firm's diligence requirements.
- Coordinated directly with the PE firm's diligence advisors to walk through the audit approach and address technical accounting questions, reducing back-and-forth delays.
The Outcome
The acquisition advanced to letter of intent within six weeks of audit delivery. The PE firm's advisors cited the clarity of the restatement documentation as a factor in their decision to proceed. The company received a valuation within 4% of management's expectations, despite the restatements, because the adjustments were well explained and did not indicate any underlying business deterioration. The deal closed the following quarter.
Learn more about our financial statement audit services, or compare an audit, review, and compilation.