Most of us get frightened when we hear that the auditors are about to audit our section/department. Audit is inevitable the moment we became custodians of other people’s assets. Audits can be sanctioned by business owners, shareholders, government requirements etc. but whoever sanctions the audits, you do not need to get frightened when auditors visit you. We read in the news numerous cases about qualified audit reports and litigation in courts about improver accounting.There are numerous cases involving improper keeping of books in Securities and Exchange Commission data base. For more details go to : http://www.sec.gov/litigation/litreleases.shtml.
The following are some housing keeping things you need to do to get a better audit report. Though this list is not exhaustive it can be the starting point.
1. Follow the company/ business policies and procedures. Most businesses have written down policies and procedures that are supposed to direct the day to day operations of a business. These policies are normally approved by the senior management and if need be by those charged with governance. During the understanding of the internal controls process the auditor reviews your policies and procedures and determines whether they are being applied as intended. He/she goes ahead to verify whether you are using them or not to execute business transactions. Examples of failure to follow established business procedure may include; failure to have required dual signature on expenditure beyond certain limits; failure to have supporting documents to support expenditures, unauthorized expenditures, improperly recorded transactions, etc. The auditor will accumulate these breaches of failure to follow the company policies and procedures and report to those charged with governance in form of a report usually called findings and recommendations report. Repeated findings can have bad consequences for the employees specifically the controller/ CFO .Their job competency begins to be put into serious questions.
2. Follow the relevant accounting principles when recording accounting transactions. Depending on the nature of the entity ensure that you follow the relevant authoritative standards when recording accounting transactions. Majority of business and organizations are guided by generally accepted accounting standards (GAAP).The power to set GAAP actually rests with the Securities and Exchange commission (SEC) however except in very cases, SEC has authorized the accounting profession to set GAAP.
3. Follow the related laws and regulations that regulate the business you operate. While most of the company policies and procedures incorporate the relevant laws and regulations , it is prudent to follow the related laws and regulations that regulate the business you operate just in case no guidance is given by the company’s internal policies and procedures.
4. Avoid being involved in any illegal or fraudulent act. This may involve fraudulent financial reporting or misappropriation of assets. Misuse of company assets, corruption, kickbacks or even theft of any nature would not be tolerated when detected. Cheating in time sheets, making fraudulent payments, including ghost workers in payroll register, receiving bribes to award procurement contracts, misuses of company credit cards, ‘cooking the books’ etc may land you to a place you never imagined you will ever go and ruin your entire career and may even render all your hard worn academic and professional credentials worth less.
5. Have internal independent reviews. It may be a good business idea to have regular internal transactions reviews. An internal audit department is the most ideal solution but not all business can afford to have these departments. Alternatively, a departments work may be reviewed by another department’s personnel on sample basis. The reviews may be done monthly, quarterly or semi annually as may be agreed by the management. Again every organization is different and both of these suggestions may not be practically possible. The other alternative if already is not incorporated in the company policies and procedures is to have segregation of duties embedded in key business processes such as initiation, authorization, recording, processing, posting of transactions and reconciliations. This will ensure that the work of one person is being checked by another; the so called checks and balances. In smaller organizations the owner has tight control over all business transactions and he / she alone may be enough in ensuring that adequate internal controls are in place.If you can afford it,then the other option is to hire an external CPA for pre-audit accounting services to help you to ensure that your records are audit ready.
6. Hire the right Personnel. Success of an organization is driven by having the right people in the organization.Have the right people in the departments. If a job needs certain specialized skills then hire the person with those skills.Failure to do this would be very costly in the long run.Time and gain we have seen departments run by unqualified personnel even when the organization can afford the specialized skills personnel. Let’s take as an example for explanation purposes the accounting department. In some medium to large organizations you find that from the CFO, controller, all the way to the accounting clerks there is none who is a CPA and even some of them do not even have accounting degrees. This is where the majority of the problem begins. To maintain their licenses CPA’s go through continuous professional education (CPEs).They are constantly informed of what is going on in the accounting professional including new standards and regulations.They are well positioned to interpret these new rules and regulations and apply them in their respective organizations.Poor accounting records may also be costly in terms of the audit fees. The CPA/auditor most of the times will charge higher fees to audit your records.
These six points are some of the basics. Follow them and you will be on your way towards getting a clean audit. Otherwise it may lead to a qualified audit opinion or an audit with a lot of findings and deficiencies. Getting a qualified opinion is not a pleasant experience. This may at times lead to disagreements with the auditor/ CPA during the audit process. Manipulation of the auditor/CPA in order to get a clean opinion is not a solution to the underlying problem of improperly maintained accounting records. If this happens and a compromise is reached by both of you, then you all risk going into more serious problems including business closure. Our memories are still very fresh with what happened to Enron Inc and the Arther Anderson Accounting firm. For more details go to http://news.bbc.co.uk/2/hi/business/1688550.stm “Enron files for bankruptcy” and http://www.forbes.com/2002/01/18/0118topnews.html “The Scapegoating Of Arthur Andersen”.
In my next blog post I will introduce the 7 Accounting Transactions Cycles and go through each one at a time for what is needed to be done to esure that each of these accounting transaction cycles pass audit test as and when needed. So stay tuned!