The CFO'S Perspective

3 Paths to Making Your Independent CPA Audit a Success


Why Audits Matter

For many middle market, closely-held businesses, the annual independent financial statement audit is an important part of the financial reporting process.

Lenders, investors and the company’s board of directors rely on audited financials to validate the interim financial data they are receiving as well as provide a sense of security as to the assets they have at risk.

As a result, many loan and shareholder agreements require annual audited financials.

In the best run businesses, the audited results should not differ from the unaudited internal financials.

That’s because the finance and accounting team is closing the monthly books on an accurate and timely basis. The team is also staying abreast of potential accounting issues that may need to be dealt with before year end.

In many businesses, incentive compensation plans may be tied to audited results.

This means that a well-managed company can ill afford to provide the management team with financial data subject to significant audit adjustments. Accordingly, it is in everyone’s best interests that the audit be conducted in an effective and efficient manner.

How Do You Ensure a Smooth Audit?

The CPA firm and the audit team selected to perform the examination have significant influence over how the audit is conducted.

However, the ultimate responsibility for ensuring a smooth audit rests with company management, in particular, the finance and accounting staff member who serves as the point person for the audit.

While it can be dangerous to generalize, it can also be fun, and it can spark a bit of debate.

So, here goes  .  .  .

Goldilocks and the Three Bears

Very broadly speaking, there are three types of “audit point resource” found in most middle market closely-held businesses that increase the odds that the audit will go smoothly. We’ll call them Type A, Type B, and Type C.

However, when none of these is present, the chances of a smooth audit drop significantly, which can be an issue for both the company and the audit firm.

Type A – The Friendly Ex-Auditor

The first category of audit point resource is someone who very likely began his or her career in the audit department of a reputable public accounting firm.

Ideally, this individual would have spent at least five years as an auditor and advanced to the level of Audit Manager.

This level of audit experience provides a background that exposed the individual to various aspects of the audit process including planning, supervision, technical research, and managing multiple audit engagements simultaneously.

Of particular value is exposure to the risk management and internal quality control procedures employed by CPA firms.  This includes client acceptance, national office or technical standards division consultation and concurring partner reviews.

Someone with this background can acquire a well-developed sense of “what can go wrong” and how to anticipate problems that are essential in executing an effective and efficient audit.

Particularly if this individual left the CPA firm on amicable terms (which should usually be the case), he or she brings to their employer’s finance and accounting function an appreciation of the value provided by an audit along with an in-depth understanding of how audit objectives are developed.

This person understands what type of information is required and why.

Type A is much more likely to view the audit firm as a trusted service provider, business partner, and useful resource.

This perspective allows Type A to work collaboratively with the CPA firm, reach out in advance of the audit on potential technical issues, and coach his or her team on the best ways to interact with members of the audit team.

All of this provides a framework for a much smoother and efficient audit experience.

Type B – The Super Accountant

The second category of finance and accounting resource does not have a background that includes serving time as an auditor.

However, this individual has been with the company for a long period of time.

And, what is most important, Type B takes a great deal of pride in keeping a really clean set of books.

The combination of those two characteristics means that this resource has been through many audits and has consistently produced the data auditors need in an easy to analyze format and on a timely basis.

Because of his or her long tenure, Type B can anticipate what the auditors will request.

This individual also knows what types of questions auditors will ask and can provide all the answers that allow the auditors to conduct their tasks efficiently.

When Type B is present, accurate, comprehensive account reconciliations are prepared regularly (usually every month).

Even without an audit background, this individual recognizes when an accounting issue may require external consultation.

To be clear, Type B is most often found in a relatively stable, well-run, profitable business.

So, the business environment and the quality of ownership and overall management have a great deal to do with Type B’s success in ensuring a smooth audit.

Type C – The Seasoned Pro

The third category is represented by an individual with a wealth of business experience who has probably worked for several companies.

Type C does not have an audit background but has been integrally involved in managing the audit process many times in a number of varying environments.

Type C has probably worked for different sized business – perhaps even public companies – and has worked with a variety of CPA firms.

This experience has provided the opportunity to learn to navigate the expectations of the audit process and translate those lessons into the framework for a smooth audit.

Type D – Everybody Else

That leaves everybody else.  Or Type D.

Type D has neither an audit background nor a lengthy tenure with the company.

Furthermore, Type D probably has limited experience managing the audit process.

And, in this environment, for a variety of reasons, the accounting records may not be in great shape.

This does not mean that Type D is not an asset to the company’s management team.

Quite the contrary, this type of individual may bring a range of badly needed skills to the organization, particularly in the areas of operations, administration, and management support.

Type D may also be very good at accumulating and summarizing internal management or operational information that is critical to running the business successfully.

And, in time, a Type D can morph into a Type B or C.

But for now, the presence of a Type D as the primary audit resource significantly reduces the probability that the audit will go well.

What Can You Do If You Have Type D?

Companies with no debt, no outside investors and which are not planning on selling or attracting new capital may not need an annual audit.

In that case, Type D may be a perfectly appropriate resource.

But a company that does need an audit and has been utilizing a Type D as its primary finance and accounting resource can still improve its chances of having a smooth audit.

Organizations such as CFO Selections can provide an interim or part-time resource that creates a combination of Type A, B, or C that will allow the company to navigate the audit process much more efficiently than would otherwise be the case.

This resource may be brought in only at year-end if the business environment is relatively stable.

Or the resource may be consulted during the year and when the audit planning process begins to help identify potential new issues that will require audit attention.

So, if you have a Type D financial resource and are facing an audit requirement – particularly an initial audit – don’t despair.

With a bit of preparation and the right external resource, there is still a chance you can get through the audit with a minimum of pain, suffering, and disruption.

dave-saportaDave Saporta has over 30 years of experience in a wide variety of business environments. He has served as CFO and Corporate Controller for large companies with international operations, as well as providing hands-on finance and accounting advisory skills to smaller, emerging businesses.

Dave also has extensive mergers and acquisition experience gained primarily through his four years as a Director of Transaction Services with PricewaterhouseCoopers.  Since 2002, Dave has been providing temporary and interim CFO and Controller services to smaller and mid-sized companies, as well as performing contract buy-side due diligence work for private equity firms.


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