“I’m being audited.” Those are three of the most terrifying words in the English language, especially when followed by the words “by the IRS.” However, when your CPA audits you, it can be a valuable process for your organization, one that provides a variety of benefits.
There are many types of audits, from financial statements to employee benefit plans to service organization controls, and the list goes on. For this article, we’ll focus on a financial statement audit. It’s essentially an examination of an organization’s financial records to obtain reasonable assurance that the financial statements are free of material misstatement. Such audits are most frequently required by an organization’s stakeholders or by creditors, investors, sureties, and regulators such as the U.S. Securities and Exchange Commission or a state Department of Financial Institutions.
One could say that being audited is analogous to going to the doctor, dentist, or mechanic for a routine examination. A clean bill of health is the expected outcome. However, even if problems are identified, the professional (doctor, auditor, etc.) can help resolve the issues with as little pain as necessary and recommend a course of future action to prevent further problems. Here are some common misconceptions:
- “The auditor is my enemy.” Your auditor should never be your enemy. Auditors do not want the process to be adversarial but want good relationships with their clients. That doesn’t mean there won’t be disagreements about how to account for or disclose information, but auditors should always strive to have their clients’ interests at heart while maintaining the independence required of the audit standards.
- “My auditor is just a numbers-cruncher.” Auditors do far more than just crunch numbers; auditors are also great advisors because they see other organizations in your niche or industry and geography and can provide additional perspective. Of course, confidentiality is paramount, but another set of eyes who knows about your organization can help point out areas of improvement and suggest positive changes.
- “My auditor is always negative.” While it is true that auditors are trained to look for things that appear wrong and sometimes do find accounts that need to be adjusted or processes that can be improved, those are great opportunities to make the organization stronger for the future. In fact, auditors are looking for ways to offer proactive advice to their clients.
What can you do?
As professionals who want to see organizations grow and improve, auditors are uniquely positioned to provide insight. However, they can’t do it alone. Engaged organizations receive much greater benefits than disengaged organizations that are going through the audit only for compliance reasons. Here are some of the easy ways to reap those rewards:
- Be involved. Audits shouldn’t be one-way streets; the flow of information goes both ways. The organization’s leadership team should talk with the audit team during the planning phase of the audit to make sure an organization’s objectives are being met. Auditors have standards they are required to follow and can also incorporate procedures to address anything that might concern the organization’s leaders, from control processes that might have weaknesses to account balances that have irregular activity.
- Get auditors involved. One common mistake organizations often make is performing transactions without consulting with their auditors to understand the ramifications such transactions may have. It is often less time-consuming and less expensive to enlist your auditor and other professionals during the transaction than to make missteps that need to be remedied after the transaction or that result in unintended consequences.
- Follow the prescription. Auditors, like doctors, will have a summary of how the visit went and must issue this in the form of a “required communications letter.” Organizations may have adjustments to their books and deficiencies in their internal controls that are identified in this letter. Don’t run from it; follow the letter’s advice and try to implement some or all of the recommended changes. Auditors want to help organizations improve and will provide additional details and suggestions that may not be in this letter.
The word “audit” doesn’t have to be a scary proposition. Your CPA has very different goals than the IRS. Next time your CPA audits you, don’t follow the common stereotypes. Embrace the possibilities that this third-party expert will bring to light. Remember, if an organization doesn’t improve, it will eventually fall by the wayside. Take advantage of every opportunity to grow!