Keeping Your House…and Your Books…In Order
When I have guests over for dinner, I empty trash cans, pull out the cloth napkins, and replace the everyday hand towel with a nice guest towel. The morning after the dinner party, I almost always say to myself that we should keep the house this tidy and organized all the time. A decluttered house feels really nice. Working at home during the pandemic has allowed me to have the time to keep the house up better and I have enjoyed it.
Think about getting your house in order and keeping it that way, similar to keeping your books and records audit ready. When business owners and their CFOs go through an audit that requires a lot of up-front preparation to get the information auditable, they generally discover facts about their business of which they were previously unaware. The ability to use financial data to think strategically and make sound decisions about the operations of the business is not a luxury to undervalue.
Auditors estimate their costs for performing your audit based on the books and records being clean and auditable. I have asked some auditors how much more first year audits cost than their original estimate due to the books and records being out of order. They report that the range is 20% to over 10 times the original estimate. This is not a pleasant outcome for anyone.
Here are seven tips on how to keep your books auditable and help reduce your audit costs.
Maintain a checking account balance in checkbook style that one person reconciles to the bank statement and then a second person reviews for accuracy.
Reconcile balance sheet account balances no less than once a quarter, if not every month. The two accounts that are generally audit gremlins are prepaid expense and accrued expenses. If you have not reconciled these accounts in the last year, I can almost guarantee you there will be unexplained numbers in them.
Keep a data room with all of your contracts and loans. With the digital age and the end of the metal filing cabinet, this seems to be something that is rarely maintained appropriately. Read more about the data room in my previous blog Who is Your Betty.
As soon as you decide to engage an auditor, your immediate next step should be to get the list of information they will want. Assign a person and a due date to each item on the list and distribute it to the responsible parties. Set deadlines for delivery of the documents and monitor progress until the tasks are completed (Excel schedule, Asana, or other project management software).
Complete the confirmation information and attorney letters immediately after you receive the list of the items the auditors want to confirm. Make sure the auditors give it to you as soon as you have a year-end trial balance for them to review.
Provide the auditors with a complete trial balance. Every adjustment to the trial balance you provide auditors increases the price of the audit.
Work on the format and disclosures of the audited financial statements for the current year as soon as the previous audit is complete. There is no excuse for digging through loan documents to prepare the financial statement footnotes after the year-end, or to read a new GAAP disclosure to figure out how to do it after year-end.
Barker Associates works with companies to access audit readiness, which is a far better investment than starting an audit with false confidence you are able to get through the audit. Let’s work together to make sure your audit fees are not multiples of the original quoted rate from the auditors. Click here to set up a free consultation.