How to Interact with the Auditors (#292)
/In this podcast episode, we discuss how to interact with the external auditors. Key points made are noted below.
Problems Dealing with Auditors
A listener points out that he has trouble keeping tabs on their work, since they like to keep their workpapers “secret.” He also has trouble ensuring that his year-end books match the records of the auditors. Otherwise, the next year’s audit staffers begin by questioning his year-end numbers from the previous year.
There are a couple of issues here. One item you might have noticed from the listener’s comments is that he may have a control issue. This is actually pretty common when dealing with the year-end audit. Let’s face it, we are in charge of the books, and we don’t like it when someone else shows up, asking uncomfortable questions. The relationship can be pretty fraught. And to make matters worse, the controller or CFO has absolutely no control over the auditors, since they report to the board’s audit committee – not the management of the company. So, they can do pretty much whatever they want.
Recommendations for Dealing with Auditors
I have two very different recommendations. The first one is to unwind, kick back, and drink a margarita. Look, this inspection is going to happen every year, there’s nothing you can do about it, so relax and just try and get them finished up and out the door as soon as you can.
If you have a suspicion that they’re doing something wrong or reaching a wrong conclusion, then feel free to state your case as often and as vigorously as you want. That’s my second recommendation. And bring up your viewpoint with senior management, if you think it will make any difference. But in the end, if the auditors fundamentally disagree with you, then you’re stuck, and you have to make the changes that they require. So suck it up, make the changes, and drink another margarita.
Despite the way this is going, I actually do sympathize with the listener’s comment. Realistically, the controller or CFO knows way more about the company’s accounting than the auditor does. But – the auditor may have a better knowledge of the accounting standards, and may have more experience with how those standards apply to other companies in the same industry – so they could actually have a valuable perspective on the situation.
Now, the problem with matching up year-end records. This is incredibly common. The auditors leave the premises with a certain set of adjusting entries, and then they may dream up a few more back in the office, which they send over - hopefully. Ideally, this should mean that your trial balance should have been adjusted in exactly the same way as their trial balance, so both parties start off the next year with the same beginning balances. The funny thing is, that has not happened to me at least half the time. There’s always some kind of difference between the two, where an adjusting entry falls between the cracks.
The only way to fix this is through repetitive communications. This means sending your ending trial balance to the auditors at the end of the audit, to make sure that it matches their numbers. This is not so easy, because the audit team has already moved on to other engagements, and it can be hard to get anyone to deal with your request. Another approach is to send the ending trial balance to the audit manager a week or two before the start of the next annual audit, when there may be a bit more interest in reviewing the information.
This is not just a minor scheduling issue. It’s actually a reputational issue for the controller, since he or she may have to retroactively adjust the beginning balance for the next year with an adjusting entry from the prior year – which means that the financial records for last year are now a little different from what you’ve been telling management all year long.
So, to sum up the relationship, the controller or CFO probably resents having the auditors around, and throws a party when they leave, but because of this problem with getting the year-end numbers properly aligned, you have to keep talking to them even during the off-season. Sorry, but that’s just the way the relationship works. If it will help any, have another margarita.