Help! The Auditors are Coming!
Originally published on October 10, 2018
Updated on October 30th, 2023
The key to a successful (and relatively stress free) audit is to be prepared. In this case study, we discuss how we helped one client through audit preparation—and the lessons we learned along the way.
Our firm got a phone call recently from the CFO of a manufacturing company. (For the sake of privacy, we’ll call the CFO “John” and the Company “Acme.”) John explained that Acme was days away from an audit and that his Controller had become increasingly anxious. He noted a few pain points the company was experiencing that could result in a less-than-stellar audit:
- Acme’s growth had exceeded the abilities of its home-grown accounting staff.
- Its financial processes were no longer efficient and effective for a company of that size.
- They had no accounting policy manual formally documenting those processes (auditors request that documentation every year).
- Acme’s auditors requested that they prepare financial statements in accordance with accounting principles generally accepted in the United States (known as GAAP) for each of their three consolidating subsidiaries in addition to the consolidated financial statements that Acme prepares each year for the audit.
After some discussion, we offered the following solutions:
- Training for the accounting staff.
- An Operational Excellence analysis to determine where financial processes need to change.
- Preparation of accounting policy manuals at the subsidiary level.
- Preparation of GAAP notes to the financial statements for Acme and each of its three subsidiaries.
Every client experience teaches us new lessons, and this one was no exception. As we were developing solutions to Acme’s issues and helping the company work through them as part of audit preparation, we noted a few observations:
When there are time constraints, the most urgent issue takes priority over the most important issue. At first glance, the risk of ineffective financial processes was the most pervasive issue and carried the highest long-term business risk. But if we didn’t get the financial statements prepared immediately, the client risked multiple debt covenant violations.
Internal controls are a reaction to experience. Although we saw duplication of efforts, segregation of duties issues and other inefficiencies during our accounting policy manual inquiries, we were surprised to see how a company that was locally owned and operated for decades had developed a reasonable set of operational controls over the years purely out of necessity.
In a consulting engagement, sometimes recommendations fall on deaf ears. We are proud of the help we have provided Acme to date. That said, the company has not engaged us to train their accounting staff or perform a GAP analysis on their current operational processes.
In this scenario, the best thing we can do is to provide as much value as possible in the areas in which we’re engaged to help. It’s our hope that our good service encourages the client to contact us for other areas where we’ve provided recommendations.
We gave Acme 100% effort and provided them with quality deliverables (three accounting policy manuals and four sets of financial statement notes in accordance with GAAP) throughout audit preparation. Stay tuned to see if we are engaged for the other recommendations.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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