TSA Renegotiation
Build audit readiness before the year end pressure arrives. From the first close, not the last.
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TSA audit coordination is the work of producing a clean external audit for Newco while core finance still operates inside the seller environment. Inside the broader TSA financial operations program this is the year one milestone that exposes every shortcut taken during the TSA. The auditor reads the trial balance, the controls, the intercompany position, and the SOC reports from the seller. Each has to be ready. The buyer-side advisor builds the audit readiness from day one, not when the auditor's request list arrives.
A first year audit on a newly carved out entity is harder than a steady state audit on an established company. The auditor cannot rely on prior year working papers because Newco did not exist last year. The auditor cannot rely on entity level controls because those controls live inside the seller environment. The auditor cannot rely on standard analytical procedures because the comparatives are partial year stubs or carve-out financials prepared on a different basis. Every audit area has to be evidenced from scratch.
The risk is that the audit budget the auditor priced at engagement extends materially as audit issues surface. Each extension produces a fee true up and a delay to the audit opinion. PE owned Newcos need a clean and timely audit to support lender reporting, valuation work, and any near term financing event. The buyer-side advisor frames the audit as a project from day one and manages the readiness across the year.
The work pairs with TSA financial reporting during TSA.
When Newco runs on seller systems under TSA, the seller's controls are part of Newco's control environment. The Newco auditor cannot test the seller's controls directly. The auditor relies on SOC 1 reports issued by the seller's auditor that describe the controls and the testing results. Without a current SOC 1 covering the systems Newco uses, the Newco auditor has to perform additional substantive testing, which extends the audit and pushes up the fee.
The TSA should require the seller to deliver a current SOC 1 covering each system Newco depends on. The report has to cover the period that aligns with the Newco audit year. Gap periods, where the SOC covers nine months and the Newco audit covers twelve, require a bridge letter from the seller confirming controls continued unchanged. The buyer-side advisor reads the SOC scope during the pre signing review and confirms it covers what Newco needs. Missing SOC coverage on any system Newco uses turns into an audit issue twelve months later.
The work pairs with TSA pre-signing leverage.
The Newco opening balance sheet is the foundation of the audit. The auditor will trace every line back to a source. Cash, receivables, inventory, fixed assets, payables, accruals, deferred items, equity. Each line has to be supported by carve-out financials prepared at close, agreed transfer of assets and liabilities, and reconciliation back to the seller's books. Where the carve-out financials were prepared as part of the deal, the auditor reviews them. Where they were not prepared with audit standards in mind, the auditor pushes back.
Opening balance issues that surface in audit are expensive. Restatement of opening balances triggers comparative restatement, which propagates through every audit area. The fix is preparation. The carve-out balance sheet should be audited at close or reviewed at close by the appointed Newco auditor. Where that is not possible, the buyer-side advisor builds the supporting work paper file that allows the auditor to accept the opening balances without an audit opinion on the prior period.
The work pairs with TSA quality of earnings overlap.
The Newco auditor will send intercompany confirmations to the seller for every open balance. The seller has to respond promptly and accurately. Seller confirmations that disagree with the Newco recorded balance produce an audit issue. The fix is the daily reconciliation routine maintained through the year. If the intercompany reconciliation has been disciplined, the confirmations align. If reconciliation has been weekly or monthly only, the confirmations expose unreconciled breaks.
The seller's audit team will also receive confirmation requests from the Newco auditor. The TSA should require the seller to cooperate with reasonable audit requests. Without that clause, the seller may charge an additional fee or push back on response timelines, which delays the Newco audit. The buyer-side advisor confirms the audit cooperation clause is in the TSA and tests it during the first audit cycle to make sure the routine works. The work pairs with TSA intercompany accounting.
A clean confirmation cycle is one of the fastest signals to the auditor that the underlying controls work.
A typical audit PBC list runs to several hundred items. Trial balance, account reconciliations, supporting schedules, contracts, confirmations, control evidence, management representations. Producing all of that under deadline in January or February of year one is impossible if the work starts in January. The fix is to produce the working papers month by month as the close runs. Each close produces a reconciliation, a roll forward, a supporting schedule. By year end the audit file is largely complete.
The buyer-side advisor builds the PBC list template in month one based on the audit scope. Each item has an owner, a delivery date, and a source. The Newco finance team produces the work papers as part of the routine close, not as a one off audit prep. The auditor receives the file through the year so the audit work begins before the formal cycle starts. The work pairs with TSA month end close coordination.
Auditor relationship matters. The audit partner who is informed monthly is a partner who can flag issues early. The auditor who hears from Newco in January only is a partner who finds issues in the audit cycle and books them as exceptions.
When Newco and the seller use different audit firms, coordination matters. The two firms will request information from each other through the SOC process and the intercompany confirmation cycle. Where the firms are the same, the work is easier but conflict of interest considerations may apply. The buyer-side advisor maps the audit relationship at close and documents the protocols for information sharing between the firms.
The seller's interest is that its audit completes on time and without complications from Newco. The Newco interest is the same in reverse. The TSA governance committee should include the audit coordination as a topic at the year end cycle review. Each side flags timing constraints, request lists, and risk areas. The work pairs with TSA governance best practices.
A clean first year audit signals to lenders, owners, and the deal market that Newco operates as a real company. The work to get there starts on day one.
How Newco and seller reconcile intercompany positions through the TSA.
Read the article →How Newco produces management and board reporting from a shared environment.
Read the article →How TSA costs flow into the income statement, balance sheet, and cash flow.
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