Posted on Nov 5, 2016

After a formal audit, audit rules require a management communication letter presented to the owners, leaders and/or audit committee that outlines control deficiencies. The individual(s) overseeing the audit process will need to confirm receipt of the management letter and sign off on the stated deficiencies and/or demonstrate how they have already been handled in a formal response. Financial institutions may request copies of these audit findings from the company.

 If there are deficiencies that require immediate or timely improvements by the company, the company will have to show how and when those deficiencies will be addressed and communicate the plan to the financial institution(s).

Beyond that, the audit team’s “job” is done. It is up to the company to determine how to make internal controls or process improvements that support compliance. However, a knowledgeable audit team will give leaders and owners some items to think about beyond fulfilling the requirements of the management communication letter.

Typically, a senior member of the CPA firm will follow up with the owner, CFO or accounting staff and talk to them about operational or financial health and efficiency. It is this discussion — before, during and after the audit — that sets audit teams apart. During that follow-up call, the audit team sets the tone for an ongoing relationship with management and business owners. Ideally, clients will contact the audit partner with questions or concerns throughout the year — for compliance and growth considerations. Owners may have questions about employment growth and overtime rules. They may want to know if an employee benefit plan audit is required, or the timing of a merger. Audit teams can often be the first people who see the advantages of a change in entity structure.

A proactive follow-up by your audit team can make the difference between a dreaded annual obligation and an anticipation of true advisory support. It may never be an amusing experience to see your audit team, but the right team can give leaders the value from their many years of reviewing financial statements, putting issues in context and identifying a new direction for the coming year. For us, it’s not just a job. It’s a relationship that begins — or strengthens — once your audit is complete.

Download the Whitepaper: The True Benefits of an Audit or Review of Financial Statements

Mike Rizkal, CPA, is a Partner in Cornwell Jackson’s Audit and Attest Service Group. He provides a variety of services to privately held, middle-market businesses with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries. He also oversees the firm’s ERISA practice, which includes the audits of approximately 75 employee benefit plans.

 

Posted on Oct 21, 2016

Let’s look at some of the issues that an audit or review can bring to light for business owners and how it helps owners make better business decisions.

Keep in mind that experienced external audit teams conduct multiple engagements each year. The best teams stay up to date on changes in audit or review standards through their profession and the industries they serve. They also get a sense of best practices from seeing the best and the not-so-great examples of financial management.

For example, the team may notice that the size or level of experience in the accounting department has not kept pace with the growth of the company. Timing may be right to hire a controller or CFO or to consolidate accounting departments in multiple locations to one central location. Perhaps key financial measures that are typical of the industry are not in place to properly forecast…or A/R is consistently dated 120 days or more.

These issues will be brought to light by an experienced external audit team… issues that internal management may not notice or want to change. We find sometimes that aversion to change or personality conflicts can inhibit improvements in an accounting department — issues that an independent audit can recognize and communicate to owners for objective, third-party validation.

Experienced auditors will take notes on these improvements and also provide insight to the owners and staff as they go through the audit process. Some of their notations may not be required in the official opinion to satisfy compliance, while others are specific to the company culture and goals.

Auditing and Independence

The guise of independence stops some auditors from consulting during an audit and sticking to a checklist. In reality, independence has four parts: (1) auditors can’t function in management and make improvements for the company; (2) they can’t perform the accounting work they are auditing; (3) they can’t advise for personal benefit only; and (4) they can’t act as an advocate for the client to a third-party. However, providing suggestions for improvements is acceptable as long as the audit team steps back and lets the business owners make decisions and implement them.

It’s not an easy role to bridge the gap between compliance and business advisory. It takes a skilled auditor to see the forest for the trees — that is, interpreting the processes and accounting into actionable business steps.

Because a team may be on site for one or two weeks depending on the scope of the engagement, the following are additional areas they may note for later discussions from a tax or advisory services perspective.

  • Improvements to internal controls, company reports and disclosures
  • Reviewing how transactions are processed
  • Accounting department structure and capabilities
  • Accounting software or hardware recommendations
  • Consulting on entity structures or planned entity structures
  • Consulting on expansion plans in other states
  • Methods to improve cash flow
  • Debt and financing structures
  • Industry thought leadership and research

Building rapport and a relationship with the business owner, staff and audit committee members can bring these needs to light. The audit team is on site to do the job efficiently, but that doesn’t mean they have to be impersonal.

Continue Reading: What can business owners expect for follow-up after an audit or review?

Mike Rizkal, CPA, is a Partner in Cornwell Jackson’s Audit and Attest Service Group. He provides a variety of services to privately held, middle-market businesses with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries. He also oversees the firm’s ERISA practice, which includes the audits of approximately 75 employee benefit plans.

Posted on Oct 11, 2016

The True Benefits of an Audit or Review of Financial Statements, Audit and Review Benefits

An independent audit or review of a company’s financial statements by external auditors has been a keystone of confidence in the world’s financial markets since its introduction. However, when discussing the value of audited or reviewed financial statements with privately held, middle-market business owners and operators, their views might fall more along the lines of obligation to bank terms rather than any true benefit to the business. In fact, industry-focused audit teams can deliver many business insights. With the help of an audit team, business owners can improve controls and operational inefficiencies while gaining a sense of best practices within their industry. An annual audit or review can support proper regulatory reporting and compliance, implementation of accounting standards in a timely manner and improved company KPIs for forecasting.

 

It’s a rare experience when clients are truly happy to see their audit team.

They may like the people on the team and value their experience, but they may not enjoy the requests for data, the potential on-site distractions or the issues an audit team may discover.

wp-download-audit-benefitsAs a CPA and career auditor in the Dallas area, I didn’t know if I could offer a different spin on this subject. Google tells us that an audit is defined as an official inspection — typically by an independent body — of an individual’s or organization’s accounts. A review is defined as a formal assessment or examination of something with the possibility or intention of instituting change if necessary. Based on those definitions, it started to take shape in my mind…official inspection? Formal assessment or examination? None of those sound all that amusing to get business owners to appreciate the experience.

OK, I am under no illusion to make the case that an audit or review will be amusing. However, I can provide some insight on how an audit or review is helpful beyond satisfying a bank’s (or other financial institution’s) credit requirements. The larger — and often unsung — benefits to a business owner are worth the effort.

What are the benefits of an audit or review of financial statements?

We’ve already mentioned the obligatory reasons that companies schedule audits or reviews. Depending on the requirements of a bank or financial institution, business owners will need to seek an independent and outside perspective on the company’s financial statements. The chosen audit services team, at a minimum, should be able to review documents, processes and procedures and then issue an educated opinion on the general health of the financial statements.

I say “at a minimum” because that is all the audit services team is really engaged to do. To get the job done, they can go down their checklist, issue an opinion and get out of the business owner’s way. For some business owners, that may be enough. For others, there can be many more benefits to the audit or review experience.

A focused audit planning meeting in the fourth quarter is really the best place to start. With an experienced audit team, this doesn’t have to take long. They should ask questions about what’s going on in the business now as well as the owner’s short- and long-term goals; it helps the auditors look for issues, develop a plan for the engagement and open the lines of communication between management and the audit team. Prior to the audit planning meeting with the client, the engagement team will meet to review the previous years’ audit to give the whole team proper context on the client, its operations, areas for improved efficiency and unique things about the client and the engagement.

Bringing years of experience from other business situations is another plus during this planning meeting. The common complaint of having to “educate” the audit team about your company or industry shouldn’t happen during the audit. An experienced team will already have that knowledge base and use their time for constructive feedback throughout the engagement.

Speaking of consulting, keep this in mind. As a business grows, the complexity of a finance department changes. General bookkeeping gives way to the need for internal accounting staff, then a controller, then possibly a CFO. Companies traditionally engaged a CPA firm to support historic accounting, tax and assurance services, but as the competitive stakes get higher, owners need more sophisticated advisory services to keep pace with change. Auditors should ask the question: Why are you doing it that way? If the answer is: “That’s how we’ve always done it,” then it’s an opportunity for real time insight during the audit engagement. An audit team should not be viewed only as an enforcement agency that stops business owners from breaking the rules.  

When looking for an audit services team, owners and/or audit committees have to consider what they are really receiving from the engagement. Here are a few key characteristics to consider:

  • Does the audit team have industry-specific experience that can provide broader industry insights?
  • Is the audit team aware of industry and technical regulatory requirements that are specific to the company’s industry?
  • Has the audit team worked with similarly sized businesses to understand best practices for accounting requirements, company reports, controls and disclosures?
  • Has the audit team provided insight on accounting department staff capacity and levels of experience as they relate to the size of the company and its growth goals?
  • Will the audit team share operational best practices beyond providing baseline assurance on the financial statements?

This list may be considered above and beyond the confines of a typical audit or review — and owners may wonder if the price tag goes with it. In fact, an experienced audit services team can note many of these needs or issues within the timeline and hours of a competitively priced audit engagement. They know what to look for and can do it efficiently.

Continue Reading: How can an audit or review help business owners?

MR HeadshotMike Rizkal, CPA, is a Partner in Cornwell Jackson’s Audit and Attest Service Group. He provides a variety of services to privately held, middle-market businesses with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries. He also oversees the firm’s ERISA practice, which includes the audits of approximately 75 employee benefit plans.