Tax and Financial News for July, 2010

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The Value of an Audit

Times are tough and youÂ’re looking for ways to reduce your overhead. As you are scanning your income statement you come to the line item for accounting services and think to yourself, "This might be a place to trim costs." So you put in a call to George, your CPA.

The conversation might go something like this:

You: George, I have just been reviewing my financial statements. Man, I didnÂ’t know that I paid you so much in fees. WhatÂ’s the deal?
George: I donÂ’t know. Let me take a look at your file and give you a call back.

As promised, George calls back and the conversation continues:

You: Hi, George. What did you find out?
George: I took a look at your bills over the past few years and it looks as if theyÂ’ve been pretty consistent. In 2007 our fees were $22,625; in 2008 they were $32,000; and in 2009 we billed $24,000. This year our fees were $24,500.
You: How much did you charge for the audit? Can I just have the tax return done and forget about the audit?
George: We charged $22,000 for the audit and $2,500 for your tax return. You can cut the audit and just have us prepare the tax return, but you save the $22,000 because we cut a lot of things in the audit that help us prepare the tax return.
You: Well, can you tell me what I would save?

You find out from George that you could save $20,000 if you drop the audit. You also find out a few other things you did not realize, such as why auditing costs so much and why it is in your best interest to continue doing it; in other words, the true benefits of an audit.

If you are like many business owners, you consider the audit and tax preparation to be costs you would like to avoid. Since what you get for the work is a few pieces of paper, thatÂ’s understandable. The work that goes into the papers and the potential benefit you reap, however, is considerable.

Audits take time for the client and the auditor. At a minimum, expect your accounting personnel to be busy preparing schedules, answering questions and providing information to the auditors. Some of management will spend time with the auditors, too, though it will not be significant in most instances. Other employees might also be asked to speak with the auditors during the course of the work.

We could go into the details here of just how this process works, but the real value to you isnÂ’t in all of the technical details. Instead, the value lies in the auditorÂ’s interaction with you and your employees. Aside from obtaining accounting documents, auditors are required to design procedures to obtain reasonable (but not absolute) assurance that your companyÂ’s financial statements are free from material errors, fraudulent financial reporting and misappropriation of assets. Auditors routinely ask management and employees about the systems used to detect and report fraud, and whether employees and management are aware of any fraud. Even if the interview process does not uncover actual wrongdoing, it can uncover areas of weakness.

Our interaction with management and employees can also yield tangible results for your bottom line. During the audit process, there are multiple opportunities for informal discussions between the auditors and company personnel. Sometimes personnel will tell auditors information they do not feel comfortable passing on to management regarding operational matters. These talks might help the auditor formulate business suggestions for you that extend beyond accounting topics.

For example, you might be keeping all of your funds in a non-interest bearing cash account or earning interest at a very low rate while paying high service charges. This happens a lot; but because of our audit procedures, we notice this when management has not. As a manager, too often you are busy handling day-to-day challenges and probably have little opportunity to focus on such things.

You might be thinking of adding a shift to your current production schedule to meet an unusually high demand, when working overtime for a short period instead will achieve your objectives and save money. A discussion with your auditor will help focus on ways to meet your needs without adding personnel and overhead.

Administrative and business practices are always taken into consideration by auditors because this helps clients – and that is our main goal. An audit can – and often does – yield results beyond meeting third-party reporting needs.

That isnÂ’t to say that your CPA does not consider cost savings or revenue raising options for you in the course of preparing your tax return or compiling your financial statements outside of an audit. But since it is a more in-depth engagement, the audit affords a greater opportunity to uncover beneficial ideas.

If your company currently undergoes an audit, talk to your accounting team regarding the additional benefits it can bring your business. If your company is not being audited, give us a call and letÂ’s explore how that process will offer benefits to your companyÂ’s operations.

Have a terrific Fourth of July!


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