How to Handle Auditors (#204)
/In this podcast episode, we discuss how to handle auditors from the perspective of the controller, and specifically, when to push back. Key points made are noted below.
Why We Party When Auditors Leave
Controllers take their entire staffs out to lunch the day after the auditors leave. It’s a celebration of not having auditors around anymore. And that’s because it’s not a happy relationship between the two parties.
The problem comes from two sources. One is that the auditors are investigating the work of the accounting staff, so the auditors’ job is to pick apart what they find and basically make nuisances of themselves. The second problem is that some auditors see themselves as being superior to the accounting people whose work they’re investigating, because of the prestige of working for a major audit firm, and because everyone else who couldn’t get an auditing job went to work in the private sector. The second point is exacerbated when the in-house accounting staff has not worked as auditors, and so doesn’t understand the audit procedures that are being used.
Auditor Retention
There are several ways to handle auditors, which are driven by the preceding two problems. First, try to keep the same auditors, year after year. When the same group keeps coming back, that means there are fewer newbie auditors who have to be trained up in how the company operates and why the accounting is done in a certain way. This also means having a word with the audit committee before they try and switch to some new audit firm, maybe to try and lower costs. Point out that having to start over with an entirely new group of auditors requires lots of extra training time by the accounting staff.
Assign Senior Staff to Auditors
Second, do the same thing with the in-house staff, which means that only the most senior accounting personnel interact with the auditors. At most, allow just one or two junior accounting staff to work with the auditors each year, so they can gradually build up their expertise in dealing with auditors.
Minimize New Practices
Third, do not blindside the auditors with new practices. If the accounting was done one way last year, keep doing it exactly the same way this year, so the auditors won’t bug you with questions about the change. And if there’s a really good reason to change accounting methods, then have a chat with the audit manager when you’re thinking about making the change. Don’t wait until the new system is in place, because then you may find that the lead auditor doesn’t like the new approach, and will force you to switch back to the old method.
Revise the Work Schedule
Fourth, after the auditors are gone, sit down with the staff and go over the items that the auditors requested, and which annoyed the staff the most. Put those items in the work schedule that has to be completed before the auditors show up the next time. That way, a point of contention is eliminated.
Attempt to Change Specific Auditors
Now, what if there’s some major friction with specific auditors? Maybe they don’t understand auditing concepts, or they don’t know how to get along with clients, or maybe they have the accounting staff running around digging up information about transactions that’s completely immaterial. The situation is even worse when they really do think they’re better than the accounting staff. In these situations, It is acceptable to haul the audit manager into your office, close the door, and engage in some polite bitching. The trouble is that the auditors actually report to the audit committee, not the controller, so it’s not possible to absolutely, positively get rid of an auditor.
Retain Competent Auditors
The reverse side of trying to get rid of auditors is to do everything possible to keep those who are clearly competent, or at least only mildly annoying. Believe me, in this relationship, a mildly annoying auditor is a prized possession. So keep requesting that the audit partner bring these people back next year.
Fight Back on Irrelevant Proposals
What about situations where the auditors propose journal entries that you think are not needed? This usually means that something is immaterial, or just moves around the balances in the balance sheet. I fight back on these proposals, usually because they come at the end of the audit, and by then I’m getting pretty punchy. However, entering a journal entry in the accounting software isn’t really very hard, so maybe it’s better to just go ahead and do it.
Summary
In short, be as prepared as possible at the start of the audit, in order to reduce friction, and give lots of warning when there’s going to be a major accounting change. Also, try to bring back the good auditors for next year, and make it quite clear which ones are not acceptable. And finally, it’s OK to be ornery – auditors deserve a little push back. It just doesn’t seem right if the annual audit doesn’t go by without at least one argument.