By Pat Voll
No one likes surprises. Anyone who has gone through an audit can attest to this, from the auditors themselves to the CFOs prepping their company for their first-ever or umpteenth audit. We were fortunate to hear from both sides of the audit process during a recent RoseRyan-hosted webinar, “Zen and the Art of Audit Readiness“, featuring the perspectives of a CFO, an audit committee member, and an auditor. The speakers shared their top tips and observations from the many audits they’ve experienced over their careers. Here are just some of the most interesting takeaways from this event.
1. A fast-growing private company’s first audit is usually the toughest – but public companies struggle too.
No matter why you’re getting an audit – because it’s a regulatory requirement or a request by investors, acquirers, or some other party – the whole effort will hinge on how ready you are for the auditor’s scrutiny. If you’ve recently taken on a new system or a new accounting pronouncement; undergone a major transaction; or your finance team had major turnover in the past year; the decisions you made along the way may not mesh with the auditor’s expectations. Even a public company with tight, streamlined operations may get tripped up by a complicated accounting issue one year.
“I’ve seen some pretty messy public companies, and I’ve seen some pretty messy private companies,” said Benjamin Shappell, partner in audit services at RSM US LLP. “On the flipside, I’ve seen very well managed private companies where the audit is smooth and crisp.”
2. The audit process can make your books and records more functional.
Is the information you’re tracking and recording reliable? The audit may reveal problematic processes and systems that are preventing management from truly understanding the business: you may have been making decisions based on flawed financial information. But by the time the auditors weigh in, you may have lost out on valuable time.
“You should really address the operational issues as soon as possible because your management team will get more use out of the financial statements while you’re in the process of getting ready for your audit,” said Mike Ownby, CFO at Infoworks.io (and a RoseRyan alum).
3. The strengths and weaknesses of the team should be evaluated before the auditors arrive.
“It’s become evermore difficult to find the talent to make sure you can do the work,” said Dan Fairfax, a former CFO at Brocade Communications who is on the audit committees of Super Micro Computer and Energous Corp., and the board of Saama Technologies.
He suggested taking inventory of both technical accounting and operational accounting expertise you have in-house. Understand the gaps so you can take action for filling them in advance. This can be a formal, ongoing endeavor, involving a skills matrix and a process for keeping skills up-to-date through training and job rotations. Very likely, in the short term, outside expertise may be needed to get the books in order and properly prepare for the audit.
In fact, leaning on a third party to achieve “audit readiness” can save the company in terms of audit costs and time, according to Shappell. Otherwise – for problems that don’t get addressed – the company can get bogged down by the audit (problematic audits can last several months, even a year).
A lease issue or account reconciliation issue “can steal time from CFOs, from accounting teams, from sales teams, from development teams – all of the individuals across the business that can’t focus on what they do day-to-day because they’re focused on an issue that could have been resolved had it been prepared as part of the audit readiness process,” Shappell said.
4. Internal controls must be stable.
Ownby noted this is a particular challenge for rapidly growing private companies in Silicon Valley, but it’s a must for every company to understand the key processes and people they rely upon for producing financial results – and to know what areas need improvement, and to have proper documentation around all of it.
Even public companies may need to take another look at how they balance workloads to ensure they have proper segregation of duties and can show they do through proper documentation. Fairfax brought up the example of a public company in the pre-revenue, development stage, with a small finance team, that had to be particularly cognizant of this issue.
5. Communication and collaboration throughout the process will minimize the risk of surprises.
As early as you can, get a plan going with the audit firm, so you understand what they need and they can get to know your business. You may even learn a few things along the way. “My view is they can make me smarter because I only see what’s directly in front of me in terms of the company I’m working on,” Fairfax said. “I can get blinders on as I’m working on my business. So, I want them to broaden me, to make me aware of new things coming down the road.”
Some surprises are bound to creep up, whether you’re about to undergo your first-ever audit as a private company, or an audit after a challenging year as a public company. Indeed, the COVID-19 pandemic’s effect on your business could bring up some new accounting challenges (Shappell had some predictions on why some audits may be more expensive because of this turn of events). Every time, being as ready as possible for the auditors can ease the entire experience.
Would you be ready if an audit happened today? Listen to the replay of “Zen and the Art of Audit Readiness” for more practical tips and best practices for preparing your company. And download RoseRyan’s newest white paper, “A Better Audit Experience: Setting Up for a Smoother Process” to learn the three most common culprits to time-consuming audits and how to over come them.
Pat Voll is a vice president at RoseRyan, where she provides strategic guidance into several practice areas, including corporate governance, strategic projects and operational accounting. She also manages multiple client relationships, develops new solutions for the firm and oversees strategic and corporate culture programs. Pat previously held senior finance level positions at public companies and worked as an auditor with a Big 4 firm.