Running the Business

It's December and you can almost smell the smoke from the computers and printers as the accounting department once again gears up for the year-end audit. Hopefully by now, you have met with the auditors; decided what items need to be verified with a physical inventory (if any); scheduled any physical inventory in October or November; sent out confirmations; and have a final list of schedules required to complete the audit. There is nothing like getting an early start where the year-end audit is concerned!

It is quite clear that the audit process is getting more and more complicated, takes more time, requires more internal staff time and is generating annual fee increases that parallel health care costs. It is becoming a real problem that will take some thought and effort to get under control.

It is also quite clear that part of the problem is the lack of continuity and experience the audit team brings to the table. As the accounting pendulum swings, the industry is experiencing a shortage of accountants willing to work in the public accounting environment. Consequently, most of the field staff is light on experience and tends to do more work then may be necessary.

The experience issue works both ways. Public accountants lack proper experience to make sound audit judgments, and the internal staff lacks the experience to challenge what the auditors want to do. As a result, more time is spent on audits on both sides that could be reduced with proper planning and input from the audit partner and CFO.

Even if you cull down the audit steps, the schedules and footnote disclosures required for today's audit put a tremendous burden on internal staff — to the point where what they produce, in many cases, has to be reworked by the CPAs, thus reversing any expected gains from the additional planning. It's really a Catch-22.

Take charge early

What can you do to avoid these problems? Well, after working both sides of the fence for many years, you start to figure it out.

Let's assume you wish to get the year end closed in time to file a timely tax return, meet your loan covenant with the bank and get a statement sent to your bonding company. I guess that would be a final, final completion date of the 3rd week of February, which is doable if all of your ducks are lined up in a row.

To make it happen — which is a benefit to both sides — you need to start early, and understand the schedules and analysis required to complete it (along with completion dates). You also need to find out where the auditors are spending time on footnotes, disclosure issues and schedules they did not put on your list, and take those responsibilities away from them to do internally. If you find it will be tough to get these steps completed, find some part-time help to get them finished.

Because of the continuous changes related to accounting and audit standards, it is easy for auditors to "over audit". The CFO really has to get involved in the audit planning to ensure duplication is eliminated and excessive auditing does not take place. One special area to concentrate on is sampling sizes, which can be reduced as risk is reduced because of the use of confirmations and analytical review.

Every effort should be made to assist the auditor in understanding what happened in your business during the current year. And if you provide such information, you should insist they take another look at their audit steps to see if they can reduce their time. Companies lacking a senior controller or CFO should seek outside help to make these decisions.

Steps to reduce audit fees

You can easily cut your audit fees if you:

  1. Get the books closed by the 15th of January if you have a December year end. That means getting the billing cleaned up and completed; the receivables analyzed with proper reserves in place; work-in-process brought up to date and adjusted as necessary; and all accruals brought up to date. Of course, doing this in the Fall and bringing the balances forward will help in meeting the January 15 deadline.
  2. Make the effort up front to take as much off the auditors' plate as you can.
  3. Provide information to help the auditors assess the changes in your business for the year, and ask that they review the audit steps and sampling sizes as a result.
  4. To save time, produce complete, understandable schedules along with proposed adjustments.
  5. Meet your deadlines and insist they meet theirs. Get part-time help if you need it.
  6. Insist on having the audit reviewed in the field.
  7. Have a realistic procedure in place to supply data when it is requested. Waiting to get data — and the starts and stops that go along with that process — costs both time and money.
  8. Complete the field work and agree on any final "material" adjustments so they can complete the tax return on a timely basis.
    Following these steps will make for a much cleaner, less costly audit and tax process. At the same time, it helps internal staff better understand the audit process and why the requested information is required to complete the audit.

The key to making this doable internally is to work at it throughout the year. Get the schedules started early and keep at it through the audit. Keeping schedules up to date certainly saves time at year-end, since problems are identified when they occur and not 10 months later.

Get the audit under control and everybody is happy.

Garry Bartecki is director of dealer/distributor services at BDO Seidman, LLP of Chicago, as well as a consultant to the AED. He has also worked as an independent CPA and consultant to equipment dealers. He can be reached at (312) 616-4677 or gbartecki@bdo.com.

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