How to take the fear and frustration out of the financial statement audit.

November 5, 2021 ROARK

Do you feel the fear or frustration of the financial statement audit? Well, chances are, if you’re a publicly held company, you have debt, or you have investors, you have to go through. My name is Eric Roark, CEO of ROARK. And I’m here to talk to you about taking the fear and frustration out of the financial statement audit.

What is a financial statement audit?

First of all, what is an audit? There are all sorts of audits that are out there, right? So there are audits for the government. There are audits and the IRS, the most dreaded one of all, right? There are audits from the state. There are audits from compliance. It just feels like lions, tigers, and bears, oh my.

But the audit that I’m talking about is the audit with your CPA firm. The independent accountants are coming out to publish an opinion on your financial statements. And look, it probably happens every year. So the question is, do you fear it, and is it frustrating? Does it hold back your business? Or do you have it to a point, and believe it or not, you can get it to the point where it isn’t that hard or isn’t that difficult.



Key to a successful financial statement audit: prepare, prepare, prepare.

So I’m here to share the secret of making a frustration-free audit. First and foremost, prepare, prepare, prepare. So many businesses are like, okay, well, we’ll deal with it whenever we get there, but that’s not the right way to do it the right way is to have everything in place to get there.

So if I were you, I’d be asking, Eric, so what are the right things to have in place? Well, I would love to change your mind today. Right? Cause it’s the mindset that is the most important. Do we look at the audit as a singular event that happens once a year? Or do we look at the quality of the financial information that we receive all year long?

The secret to a great audit is a great financial statement close process.

Because really, the secret to making a great audit has nothing to do with the audit itself. It is the process, the financial statement close process. And what is a financial statement close process, right? All the steps and processes, and methodologies you have in place to ensure that your financial statements are closed accurately and timely.

Do you have the right staff to handle a monthly financial close process?

So let’s talk about some essential items to the financial statement close process. First and foremost, the one that gets overlooked the most is having the

right staff. You have to have the right team that is knowledgeable, the correct number of people. And if you don’t have those things, then you’re always going to be struggling.

And being able to structure that accounting department to optimize that is going to be very important. So typically, you’ve heard of people, processes, and systems. Well, there we go. The first question is, do we have the right people.

Document your process and create a financial statement close checklist.

The next question is, do we have the proper process? So when we look at the process and go through the process, The first thing you need is a financial statement close checklist. Here’s the list of all the regular recurring items we need to do and who needs to do them. And here’s when they need to be done by, to make this work effectively.

Think of every monthly close as a project.

So look, the financial statement close isn’t so much about accounting. It’s really about the success of your project management system. Think of every close as a project, there are so many multiple things and dependencies, and the better you’re able to manage those dependencies, the more success you’ll have.

For example, from the first day or two, you’re going to want to close down the sub-ledgers. These are AR, AP, inventory, with the transactional level detail. When you’re going through a financial statement audit, you’re going to be on a Generally Accepted Accounting Principles (GAAP) basis because that’s the way that they report.

So then you’re going to be doing accruals and adjustments to make those in line with GAAP. And then there’s going to be a review or estimation. You’re going to want to go through all your estimates, maybe inventory, bad debt, things like that.

And then you’re going to want to go through your review process as well. So the question becomes, do you want a soft or a hard close? That becomes an opinion based on the business. So maybe monthly, some businesses wish to a soft close because of how their numbers are the need for financials and how they work internally.

And then quarterly and annually, you need a hard close. What I like to do is just analyze the company, say, Hey, these are what we can do in the months that aren’t quarter-end months. And these are the things that need to be done quarterly. And depending on how significant there’s a lot of considerations, how significant the transactions are, how much they affect the financials; I’m going to say they affect the direction and making those decisions.

And you have monthly; you have quarterly and annual things that you’ll look at. Some things are annually, like commitments and contingencies, but I usually wouldn’t look at my financial statements unless there were a known issue. Those become disclosures that go into your footnotes as opposed to statements that arrive on your financials.

So I think going through that and developing that process is going to be important.

Use systems & software to expedite and make the financial statement close process easier.

The last thing is going to be the system. So when we look at systems, some systems make it easier than others, and there is additional software that you can buy to help with reconciliations, to help with assigning, managing the close process.

And being able to report at the end of the day, creating the financial statements and the financial analysis to the investors. These are all going to be critical to expedite your financial statement close process so you can look at information like the budget to actuals, trend analysis, and find any errors or outliers. So, I like to do some of the tips for financial statement closed processes, one for the balance sheet, I do an account reconciliation for literally every account. I put it into a folder. The account reconciliations are divvied up by the staff and by one by one. And then there’s always a preparer and a reviewer in that process.

When you get to your P & L, there’s specific analytics that we look at. Analytics may vary by industry. Key performance indicators, and again, you kind of look and see what the most significant things to your management team are? I like to look at trend analysis. So month over month, trailing 12 months, what are things looking at from a trend?

And then you’ll see like one month will be all this expense. The other will be none. Well, why is that? It doesn’t mean it’s wrong, but it provides excellent questions. The other thing is year-over-year analysis. How are we doing this year as compared to last? Common size analysis, where you make everything as a percentage of revenue and just looking at different variations, really gets you comfort on the income statement.

Non-recurring items to consider in your financial close or financial statement audit process.

Know the changes to GAAP that tend to change annually.

You want to look out for whenever you’re getting through an audit and a close process is a couple of things, and these are non-recurring items. One, you’re going to want to stay up on changes on generally accepted accounting principles. They do happen. They tend to happen every year.

Stay current on your contracts and contract accounting.

And two, one of the things that get overlooked and the most significant variances are our contract accounting. There are several things to consider for contracts: stock options, certain required minimums, guarantees of debt, bank covenants. I mean, there are many things in these contracts that significantly impact your financials and your financial condition.

Enjoy a frustration-free financial statement audit.

So lots to consider whenever you’re looking, but the key to making the audit simple and frustration-free is to prepare for the audit every time you close. And by doing that and putting in a solid financial process, you’re going to see that the audit will go from a thing of frustration and fear once a year to just another smooth audit going through. It’ll reduce your time.

It will reduce your management and distraction and lower your costs with your auditors and build stronger relationships. So today, we’ve talked about how to make audits frustration-free.

If you have any questions about where you’re currently at, or if you’re feeling frustrated and need audit support,

contact us for a free consultation at ROARK. 

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