What a Series A biotech should have in its books before the first audit

Most Series A biotechs meet their first auditor because an investor rights agreement or a lender says so. The team has been heads down on the program, the books were handled by an outsourced bookkeeper who reconciled the bank and not much else, and now a firm wants three years of support for numbers nobody has looked at closely. The audit itself is rarely the problem. The problem is that the audit exposes everything that was deferred.

The good news is that the list of what needs to exist is short and stable. If these items are in place ninety days before fieldwork, the audit is a few weeks of answering questions. If they are not, it becomes a quarter of rebuilding history while trying to close the current month.

A chart of accounts that matches how you spend

Biotech spending is program driven, and your auditors and your board both want to see it that way. The chart of accounts should separate research and development from general and administrative at the top level, and within R&D it should let you tag spend by program and by activity type: external clinical, external preclinical, CMC and manufacturing, internal personnel, and lab consumables. If your ledger has a single line called Research Expense, every question about it will require a spreadsheet you do not yet have.

A close that actually closes

The first thing an auditor assesses is whether the monthly close is real. That means bank, credit card, and payroll accounts reconciled every month with reconciliations that are reviewed by someone other than the preparer. It means the general ledger agrees to the subledgers for fixed assets, prepaids, and accrued liabilities. It means a close checklist with dates and initials. A close that happens quarterly, or that is reopened every time someone finds an old invoice, will show up as a control deficiency.

Accrued research and development

This is where first audits go sideways. Contract research organizations, contract manufacturers, and central labs invoice weeks or months behind the work, and their invoices rarely line up with accounting periods. Auditors will test that you accrued for work performed but not yet billed, and they will want to see how you estimated it. You need, for every material vendor contract, a schedule that shows total contract value, work performed to date based on operational data, amounts invoiced, and the resulting accrual or prepaid. If your accrual is simply last month's invoice, expect a proposed adjustment and a comment in the management letter.

Equity, stock compensation, and the 409A

Your cap table in Carta or its equivalent must agree to the equity accounts in the ledger, share for share, including preferred stock by series, common, options outstanding, and any warrants issued to lenders. Stock based compensation under ASC 718 needs a valuation for each grant date, which means a current 409A report and a record of which grants used which valuation. Auditors will recalculate the expense for a sample of grants. If the option ledger has grants without board approval dates or exercise prices set below the 409A, that becomes a legal issue before it becomes an accounting one.

The items that are easy to forget

• Leases. Any office or lab lease longer than twelve months goes on the balance sheet under ASC 842 with a right of use asset and a lease liability. This includes the lease you signed in a shared facility.
• Grants and collaboration revenue. If you have received grant money or a collaboration payment, the accounting under ASC 606 or ASC 808 must be documented in a memo, not just booked.
• Fixed assets. A register listing every asset over your capitalization threshold with cost, in service date, and depreciation method. Lab equipment bought on a credit card still counts.
• Prepaids and deposits. Insurance, software, conference fees, and CRO advances all need a schedule that rolls forward.
• Debt. If there is venture debt, the amortization of fees and warrants and the covenant calculations need to be documented.
• Tax. A provision memo, even when it says the answer is zero, and the state nexus analysis if you have employees in more than one state.

The going concern memo

Every biotech that has not yet raised its next round faces this. Auditors must evaluate whether there is substantial doubt about your ability to continue for twelve months after the financial statements are issued. You need a runway analysis that starts from audited cash, uses a board approved operating plan, and shows the month cash runs out. If that date is inside the twelve month window, management needs a documented plan to address it, and the auditor will assess how probable that plan is. This is the one analysis where the finance function and the CEO must agree on the story before the auditor asks.

The ninety day timeline

1. Ninety days out: chart of accounts fixed, all open periods closed, accrual schedules built for every material contract.
2. Sixty days out: cap table reconciled, 409A confirmed current, lease and revenue memos written, fixed asset register complete.
3. Thirty days out: prepared by client list received from the auditor, owners assigned to every item, system access provisioned for the audit team.
4. Fieldwork: someone whose only job that month is answering the auditors within a day.