Eat the Frog Now: Your Auditor Will Thank You Later

A famous quip advises, “Eat a live frog first thing in the morning and nothing worse will happen to you the rest of the day.” Metaphorically, this comic principle holds true for the annual compliance ritual of the company audit. Those who invest the time to prepare for the audit process in advance will have a smoother and less stressful experience than those who delay or procrastinate. Whether you recently completed an audit or one is coming up soon, here are some “frog-eating” tips and best practices. 

Reconcile, Reconcile, Reconcile

This is by far the most crucial step in audit preparation. Every significant account that shows up in the financial statements should be reconciled to the respective underlying records as of year-end. Most adjustments discovered during fieldwork relate to one of the following reconciliations being incomplete or inaccurate: 

• Cash and debt: Reconcile to bank statements
• Accounts receivable and payable: Reconcile to underlying detailed aging subledgers
• Investments: Reconcile to brokerage statements
• Fixed assets and depreciation: Reconcile to fixed asset software reports
• Prepaid assets or deferred liabilities: Reconcile to the transactions giving rise to the prepaid/deferral 

It is critical to ensure that significant reconciling items have support for such items. For example, if you have a reconciling item on the bank reconciliation for outstanding checks, do you have a complete list of outstanding checks to support that amount? If you manually accrue invoices for trade accounts payable at the end of the year, do you have a list of invoices to support the balance? These sound like simple suggestions, but they do trip up many organizations. Moreover, don’t forget to have a controller or CFO review all reconciliations prepared by accounting staff.

Prepare Everything on the Request List before the Auditor Arrives

Your auditors should provide a list of items needed for the audit, which usually includes requests for populations of transactions for sample testing. Provide supporting documents electronically, if possible, rather than in paper format. Generally, if your auditors have the requested items before or at the start of the audit, they can complete the audit faster. 

The theme of preparation should extend beyond the finance department: include information technology (IT) staff and management team members. IT professionals may be able to leverage technology to help streamline the audit process and improve efficiency. Auditors will likely have questions for management as they take stock of a company. Such inquiries can identify problems or illuminate areas of opportunity for a company, so handle them accordingly. 

Preemptively Explain Significant Changes in the Business 

Auditors use analytical procedures for a portion of testing in most areas. So, if head count is the same as the prior year, but payroll expense increased by 25%, they will ask why. Addressing items such as these ahead of the audit, rather than researching when asked, saves time for everyone. Likewise, if during the year you enter into a major transaction, communicate this to your auditors up front. They will likely be able to ensure you are applying the correct accounting treatment from the start. 

While it is true that auditors review the past, business leaders should not discount their ability to provide insights and perspectives into many aspects of the enterprise and help shape a stronger future. 

Think Beyond the General Ledger

Technically speaking, an audit is an annual compliance requirement. However, auditors and clients should both think more broadly about the endeavor. The days of printing out the general ledger and handing it to the auditors are over. That document only tells part of the story about an organization’s financial stability and overall sustainability. 

Finance executives should share information with their auditors that, on the surface, might not seem directly related to the audit. Being proactive and generous with business information will make the audit process easier down the line. This information-sharing should include difficult or subjective areas that affect business risk or performance, such as insured estimated liabilities, workers’ compensation reserves, debt swaps, or management agreements. 

Don’t Stop Communicating

Communication is key, not only before and during an audit, but also throughout the year. In addition to assessing compliance, an auditor can be a valuable adviser for business planning and strategy. 

Finance leaders should take the opportunity to update their auditors on priorities and initiatives. If the auditor is aware of plans or strategies that are in process, he or she can provide support, tools, and resources to navigate accounting challenges beforehand instead of after the fact, delivering operational value to the organization. 

Those companies who “eat the frog” and invest the time to thoroughly prepare, reconcile, over-communicate, and keep their auditors abreast of changes will reap the benefits of an audit relationship that delivers value beyond compliance requirements.