Oh, no! The auditors are coming.

The annual audit is a required procedure for public companies, as well as private companies that utilize debt markets or other investment resources. Each quarter and year-end, financial reports must be filed that describe the health and activities of the business. It can be a disruptive and painful experience, but there are steps that an organization or business can take to make the process run smoothly.

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	Whether you are a small business or a large corporation, one contact person should be at the hub of your audit prep team.

When an independent company comes to poke through financial statements, they are working in a compressed time frame. Several years ago the Securities and Exchange Commission (SEC) reduced the deadline by which a company must file its quarterly earnings following the close of its quarter from 60 to 45 days, and its deadline for its fiscal year-end financial reporting from 90 to 60 days. Both are a short amount of time to examine the period's transactions, and the tight timeframe places a great deal of pressure on everyone involved in the audit process.

Plan for your audit. Get as early a start as possible. The following are six key steps a company can employ to develop a pain-free audit experience.

1. Analyze your internal resources. What resources do you have that can make the audit run smoothly? How much of the prep work can you manage yourself? Do you need to call in external experts to support the audit prep to look at your supporting documents, point out potential errors, and analyze your processes to determine if they are adequate? Laying a solid foundation for your audit will eliminate much of the pressure that can accompany it.
   
   
2. Appoint an internal team leader. Whether you are a small business or a large corporation, one contact person should be at the hub of your audit prep team. This person assures that the appropriate information flows to your audit firm, that adequate resources are available, and that both the internal team and the public auditors are accountable for successfully meeting deadlines.
   
   
3. Select the right external support firm. Once you determine your competencies, look for an independent firm that addresses any gaps in your own competencies and/or resources. Do you want one that is industry specific? It may be beneficial to bring in an accountant who has experience with the accounting firm you've hired to help with the prep work, one that is familiar with what the accounting firm will be looking for. The biggest factor to take into consideration in hiring a firm is the level of experience that the third party firm has and what competencies it can bring.
   
   
4. Meet early with the auditing firm, and solicit feedback. Find out what your auditing firm will need, the timeline, and their specific requirements. Define all of these parameters at the beginning of the project; then determine the resources needed to meet expectations in a timely manner. Pull a portion of the documentation together early, and show it to the auditors. An early check can help to avoid a costly redo of mounds of work in a very constrained time. The most common mistake that companies make in an audit is not meeting frequently enough with their public accountants and failing to solicit their feedback.
   
   
5. Test your transactions and processes. Being current on your internal controls auditing is essential. Some companies routinely do a big push from March through August so that they can be confident when the accountant arrives in the fall for his preliminary auditing work. Ask yourself, "What is our understanding of the processes? Do they reflect good controls? Are the processes actually being followed? If not, why?"
   
   
6. Reconcile your accounts. This is a basic control that all companies should utilize. Once financial statements are closed, it is important to go back and validate that your account balances are properly stated. Many organizations, large and small, don't have a good understanding of proper account reconciliation.

When a reconciliation of accounts payable or accounts receivable is not well supported, the auditor has to do a great deal of work to validate whether or not the balance is properly stated. If a business adopts the practice of ongoing account reconciliation, pinpoints areas that have been recorded incorrectly, and resolves them in a timely period, it will go a long way toward getting issues resolved more easily during your audit.

Build these basic steps into your financial reporting strategy, and your audits have a good chance of running smoothly. However no matter how you design your processes and controls, you still ultimately depend on the honesty of your personnel. In order to ensure that management overrides do not occur or go unreported, consider putting in place an effective whistle-blower policy. Ethics programs can help employees make difficult decisions or provide them with a mechanism to report anonymously areas of concern. Accurate financial statements should tell the history and reflect the picture of the business, and at some point, everything should flow through the financial statements.

CFO Magazine and the U.S. Securities and Exchange provide a wealth of information online with daily industry updates. For more technical information, the Financial Accounting Standards Board and Public Company Accounting Oversight Board are great sources. In addition, several national professional associations offer ongoing educational opportunities through local chapters, websites, and publications, as well as certification programs.

About the Author

With more than 25 years in financial management expertise, Lawrence Varone is a project manager at Lyndon Group LLC, a project-focused accounting and financial management consulting firm serving the global marketplace.  Varone's areas of practice include Sarbanes-Oxley compliance, SEC reporting, audit preparation, and internal control outsourcing services.  He can be reached at 949-494-7722 or at www.lyndongroup.net. 

On the net:

CFO Magazine
www.cfo.com

U.S. Securities and Exchange
www.sec.gov

Financial Accounting Standards Board
www.fasb.org

Public Company Accounting Oversight Board
www.pcaob.org

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