As the year’s end approaches, management from small, closely held companies to large multi-national conglomerates prepares for Dec. 31. Unless your company has selected another fiscal year end, tax planning and year-end audits are on your mind.
“While most executives see the benefits of tax planning, many times audits are seen as a necessary evil or worse, a complete disruption to your day-to-day business,” says Karen Fortune, senior manager at Tauber & Balser, P.C. in the Forensic Accounting & Litigation Services Group. However, the good news is that there are ways to get the most out of the audit, to benefit your company and to ensure that it is not a painful experience. Smart Business asked Fortune how.
How can I reduce the time that the auditors
spend at my offices?
If your auditors do not already provide you with a Needs List, request one in advance. Many times, management waits until the auditors arrive and then asks, ‘What do you need?’ This approach causes unintended delays when auditors wait for requested paperwork to trickle in. Your best bet is to have everything on the Needs List ready for your auditors’ arrival or, better yet, to send it to your auditors ahead of time.
A Needs List details the documentation that the auditors believe necessary on the front end, in order to plan and begin performing the audit procedures relevant to your company’s financial statements. For example, your auditors may request, among other things:
Trial balance, general ledger (usually electronically) and draft financial statements with footnotes. Note: It is an incorrect assumption that the auditors will draft your financial statements and footnotes. Management is responsible for the financial statements and related notes, and the auditors are required to opine on them.
Confirmation request letters for bank accounts and loans, selected customers and vendors (identified by your auditors) for balances owed and attorneys for an understanding of your contingent liabilities.
Detailed year-end accounts receivable and payable agings, inventory listings, pre-paid and accrued expense schedules, fixed asset and depreciation listings, and stockholders’ equity schedules.
Revenue schedules and documentation specified by the auditors, and supporting documentation for related party transactions, legal and payroll expenses.
Contracts, lease agreements and board-of-directors meeting minutes.
In every audit, auditors will require communications with various personnel regarding your company’s audit issues. By instructing your personnel to be responsive and prompt, your auditors will be able to efficiently and effectively accomplish their tasks and testing.
Also, depending on the complexity of your company’s business dealings, inform your personnel that they may be required to memorialize accounting procedures and reasons for the decisions they make. For example, if your company has evaluated impairment of fixed assets or intangibles, your personnel will need to document the calculations and rationale behind your accounting and financial reporting and likely spend additional time with the auditors communicating on the conclusions.
How do I maximize the value from the audit?
Auditors are required to communicate their audit findings to the audit committee or to the board of directors if no audit committee exists. My first recommendation is to be certain that members of the audit committee or board have an appropriate level of understanding of financial statements, internal controls and accounting. If you do not have such members, it is advisable and in many cases mandated that you recruit professionals for the roles.
If your auditors do not present a written management letter to you, request that they provide you with the audit findings, all of the adjusting journal entries that they proposed to management and weaknesses identified in internal controls. It is important that you gain an understanding of the issues that the auditors identified so that you may meet your fiduciary duty as a director or audit committee member.
In addition, it is appropriate to ask participating management members (if they are members of the board) to excuse themselves from a portion of the discussion with the auditors, in order to have a candid conversation regarding management’s performance. This is an excellent opportunity to get an objective look at the professionalism and mindset of your management team.
Any other tips?
Your auditors are not seeking to find fault with your company’s books or personnel, but they also are not seeking to rubber-stamp the company’s representations. Your auditors are held to certain standards to appropriately plan and perform their audit to state whether your financial statements are presented fairly in accordance with generally accepted accounting principles.
KAREN FORTUNE is a senior manager with Tauber & Balser, P.C. in the Forensic Accounting & Litigation Services Group. Reach her at (404) 814-4968 or firstname.lastname@example.org.