Audits of financial statements provide significant value to owners, regulators, creditors and investors. Financial statements are integral to the capital markets process. Significant decisions are made every day in part, based on company financial statements and disclosures. Audits of these financial statements are relevant and crucial to the processes that support business and investing transactions. If this is so, then embracing the audit process should command special management focus and attention.
But what really makes a difference?
There are some fairly well publicized blocking and tackling ways to approach a financial statement audit. What changes an audit into something other than a business interruption? I think it is about attitude and being engaged. Here are some ways to think and act when preparing for an audit.
- Enhance and publicize the tone at the top regarding audits and their relevance and importance to the capital markets. Set goals around the company’s responsibilities around the audit. Allow the company to own the process not as another mandatory project, but as a contributor to the capital markets and the relevant company stakeholders.
- Be sufficiently familiar and interested with current developments or issues faced by auditors from the Public Company Accounting Oversight Board (PCAOB), the American Institute of Certified Public Accountants (AICPA) or other regulatory bodies. Valued auditors are financial advisors who are students of their audit client’s business. A valued audit client understands and appreciates how auditors must conduct themselves in accordance with their professional standards.
- Understand the audit risk areas and thoroughly document the company’s controls, actions and response. Audit procedures are nearly always risk-based where more time and effort are spent on areas where the risks of material misstatement are higher. Companies should have their higher risk areas covered in full. Of course, the added benefit of this focus is that management can feel comfortable with their assertions around those risk areas (e.g. revenue, fair value estimates, business combinations, income taxes, certain accruals, pensions, loans and receivables).
- Request that the auditor and you consider how to move up audit procedures to earlier in the year. Your auditors will thank you and hopefully, this will relieve some of the stress around year end closing and reporting.
- Review last year’s management representation letter (or obtain a sample letter from the auditors) with the financial and executive staff. Sometimes, management representation letters are signed off without much of a company review (besides possibly legal reviews). The management representation letters serves as a good reminder for management - what is important to the audit? If an item is called out in the management representation letter, one can assume there are valid reasons to do so in addition to covering the backside.
- Employ effective project management techniques (e.g. assigning accountability using a responsibility assignment matrix). An audit should be company managed, with processes, timing and all deliverables bought into by both company management and the auditors. Changes to milestones and deliverables should be tracked and explained as the process progresses. The just completed process should be debriefed and the next audit process brainstormed. New considerations and initiatives should be documented and managed accordingly.
- Communicate with a purpose. OK, communication is usually on every “make the audit great list.” It is difficult to dispute the assertion that early auditor communication and consultation makes for a smoother and more efficient audit process. Here, I am talking about always including the auditors in up-front dialogue at least for awareness purposes, but then proactively engaging them for auditing purposes. Auditors should be right up there with legal counsel in the communication chain. Many times, those things that are not communicated in a timely fashion to auditors are the very things that turn an efficient audit into a possible nightmare to complete.
- Do not obsessively focus on audit costs. Quality, reliability, professionalism and relationships are far more important than cost control. Over my audit career, I am not aware of an efficient and effective audit where the company was constantly managing and bickering over audit costs. It simply spreads an air of contentiousness that is not helpful to an audit relationship. Audit firms these days are constantly faced with regulators and others weighing in on not only what the professional standards are but how to interpret them. Auditors change their audit approaches frequently in response. Many businesses these days face similar regulatory challenges.
If you are subject to an audit and do not like the process, consider what radical changes you can implement to meet your desired result.
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Sam H. Carr is the Managing Partner of Carrtegra, LLC. Sam has over 30 years of experience in accounting, auditing, financial management and consulting. Sam has focused much of his career on process improvement and redesign. Sam holds an MBA and is a CPA, CIA, CISA and a Certified Compliance and Ethics Professional (CCEP). Sam is a finance and operations executive with broad-based experience that includes 12 years as a CFO or Chief Accounting Officer in both public corporations and private entities, and fourteen years with an international public accounting firm. Sam orchestrated an Initial Public Offering of a consolidation of dental practices throughout the United States. In addition to his IPO experience, he owns a powerful track record of demonstrated skills in a wide range of business environments including designing financing, mergers and acquisitions and growth companies. Sam has been the Chief Executive of a management consulting firm for the most recent 10 years. Sam’s focus has been substantially on quality of services and valued solutions as well as client and employee retention.