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An Audit is not Always a Bad Thing

Tax and Financial News

October 2006

An Audit is not Always a Bad Thing

If you are a typical business owner, one of your guiding principles may well be that "lower expenses equal more money in my pocket."

To some extent, that is a valid philosophy, which is why you don’t like it when a bank tells you it will require audited financial statements in order to extend you a big loan. We accountants sometimes think bank requirements are a little stiff, which is why we try to educate them on the various types of services we provide. Our hope is that they will require a lower level of service and save us significant fees. This is especially true with smaller organizations whose operation can’t support the costs of more extensive services.

There are, however, times when neither of us will be able to convince a lender that an audit is unnecessary and it is then that you really need to focus on how to get value from the auditing process.

First of all, you can be fairly certain that an audit is going to disrupt the operations of your company. You will find this to be especially true for the accounting department, though operations personnel may not spend significant time with the auditors. Exactly how disruptive the process will be is dependent on how well the auditors work with your personnel and how cooperative your staff is in return. That’s why both parties should seek to establish an understanding of who is responsible for doing what during the process.

Typically, employees do not like to have extra work piled on them, which is what the audit could cause. Auditors will ask a lot of questions about how your business operates, what the paperwork flow is like, how involved management or the ownership group is in day-to-day operations, etc. and it’s best to instruct your personnel to be as cooperative and forthcoming with accurate information as possible. This is probably where you will get the biggest bang for your buck.

Auditors are inquisitive for two reasons: first, to find out how a system works, where the possible points of error or fraud may be, and how to test transactions to minimize the possibility of financial statements so wrong they could sway the user’s understanding of company performance over the past year. An auditor will tell you that the audit is designed to detect "material" misinformation in the financial statements resulting from errors or fraud.

FYI: auditors will not look at every transaction, because it would take too long and cost too much. That’s why we say that we are looking for "material" errors. It’s simply not practical to audit so much that every insignificant error or misclassification will be found.

Secondly, auditors are looking for ways your company might operate more efficiently and uncover conditions that could lead to possible errors or fraud. If there is a hole in your system, we want you to know about it. It may be too costly to plug, but at least you will be able to make an informed decision about what to do and how to proceed. You may also decide not to adopt efficiency suggestions, but at least you will know your alternatives.

Auditors are people, too, and like most people, get a good feeling when we know that we have been able to help someone improve their lives. If we can offer suggestions that enhance your profitability and satisfaction with your company, compensation and quality of life may increase as well. That is what makes our profession rewarding and one of the major reasons your employees will want to assist us in every way they can. When we ask them to prepare various schedules or provide certain documents, it’s an advantage to help as much as possible. Not only will it reduce the time we spend - and keep the costs down - but also help us concentrate on improvements to your company.

There are, of course, limits to what your personnel can do as they continue to keep the company going on a daily basis, so don’t hesitate to tell the auditors when they are asking for too much.

In addition to instructing your personnel to cooperate with them, you may also want to let them know that you consider the auditors a valuable part of your business team. As members of that team, your staff can bring concerns to the auditors and discuss possible solutions with us, since no concern can be addressed if it is left unspoken. The point is that your people work day-in and day-out at your business and may see things the auditor could miss. By working together, the auditors will be able to provide you with the best possible advice.

Too often, the term "the auditor" strikes fear in the heart of an employee, which can be difficult if they become defensive or uncooperative. Educating your employees that the auditors are just part of your business team and fostering open communications will help us provide you with maximum value for your audit dollar. You might discover that what you receive from the process exceeds the cost of the service!

Have a terrific October.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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