Part 3 of 3: Building a Stronger Financial Management Process: The Audit: Don’t Get Scared, Get Organized

This is the third of a series of three short newsletters on how to stay ahead of finance process issues and prevent these challenges from becoming more significant problems.  Each newsletter has addressed a different aspect of these challenges: Producing Data, Garbage In, Garbage Out, and The Audit: Don’t Get Scared, Get Organized (today’s topic).

As noted in the first two newsletters, a strong finance team is critical to the success of any company.  One of the roles of the finance team is to prepare for and manage the external audit of the company’s financial statements.  Several of the points covered in the previous newsletter, regarding controls over spreadsheets and data management, will also be helpful in preparing for the audit, but we recommend some specific steps below.

Challenge – The External Audit Takes an Inordinate Amount of Time to Complete 

Many companies have experienced this, and it is human nature to blame the auditors, but there is usually more going on here.  Here are some of the symptoms:

• Documentation requested by the auditors is difficult to locate or does not agree with the accounting records. Documents that do not support recorded amounts are considered errors by the auditors, so they need to expand their testing and the expanded testing often finds more errors.
• The audit takes much longer than planned, so accounting firm staff are reallocated to other commitments and replaced by staff new to the audit.
• Once problems start Auditors are no longer committed to deliverable dates and are reluctant to commit to new dates, audit cost overruns become obvious and a sore point in the relationship with the auditors.
• Audit fatigue sets in on both sides and it becomes very difficult to manage the process.

Action Plan, Step One – Prepare Well in Advance for the Audit

• Review issues experienced in the prior audit and take steps to correct them before the audit begins.  If certain transactions, or a class of transactions, have been challenging to audit in the past, or are new to the company, consider performing an ‘internal audit’ of those transactions so the issues with their documentation can be addressed before the audit begins.
• Request a detailed timeline from the external auditors that includes key deliverables to and from them.  Last year’s listing of schedules ‘Prepared by Client’ is a good place to start.
• If the audit includes multiple locations, make sure the reporting from the auditors at the other locations to the auditors in the center is included.  The auditors at the center, particularly at the staff level, may not see this as ‘their problem.’

Action Plan, Step Two – Proactively Manage the Audit

• Insist on frequent (and brief) meetings between key audit firm and company personnel to assess progress.  These meetings should be more often than once a week during the “heat” of the audit, daily 15 minute ‘stand-up’ meetings are a good idea during this period.
• The objective of these meetings is to timely find and address issues (e.g., exactly who is to give what to whom).
• On a weekly basis these meetings should seek to reaffirm that all parties remain committed to the ultimate deliverable of a signed audit opinion on the required date.  Auditors may be reluctant to raise a concern about timing of completion in these meetings, as it can be a difficult conversation, but it is important to identify any potential problem early so it can be addressed.

Conclusion

A Company can achieve an effective and efficient audit by starting to plan well in advance of when the audit work is to be done and proactively managing the process from start to finish.