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 [email protected].