How To Ensure Your Audit Process Goes Smoothly (Even When Something Goes Wrong)

Well, now you are in it. Something went wrong, and your auditor is breathing down your neck. That’s not good. There are a number of reasons why this could happen, so let’s break down some potential problems and come up with a few practical solutions.

Before we delve into problem-solving, it’s important to know what an audit actually is. At a high level, you are hiring a licensed third party to review your financial statements and attest that they are accurate to a relative degree of certainty. The most important word here is “attest.” This is a fancy way of saying that the auditor is putting their and their firm’s name on the line by saying your financial statements are accurate. Audit firms and careers can be destroyed by incorrect attestations. Just look at Arthur Anderson and Enron. The point to take away is that an auditor takes their attestations seriously, so they will likely get very angry if they feel you are hiding things.

Beyond the weight of the attestation, auditors are also held to budgets. You probably have one outlined in your letter of engagement. The audit staff is under significant pressure to get the audit done within the allotted hours budgeted. If they don’t, they either have to pass the costs onto you or eat them themselves. Both options can reflect poorly on the auditor. Furthermore, many companies conduct audits in the same date range, so if the audit takes too long, the auditor can’t do as many audits, which can cause more stress. The takeaway is that the auditor doesn’t want the audit to take any longer than you do, so the more you assist them, the better it will go for both of you.

When an audit starts, the auditor will come up with a timeline and a list of items that they need you to provide (colloquially called PBCs, or “provided by client”). It is in your best interest to get the information to the auditor as soon as you can. When you provide your PBCs, make sure you understand what the auditor is asking for. Don’t just send them random schedules so you can check the box. This will cause a lot of problems later on.

An auditor will take your PBCs and perform various tests. A test could be as simple as making sure your accounts receivable balance matches your invoice details. Tests normally start with a small sample size, and as long as the auditor finds no issues (e.g., missing invoices), they can normally assume that things are good. When you give incomplete, outdated, incorrect or difficult-to-follow PBCs, it makes the auditor’s job harder, and they’re more likely to find an error.

Okay, so the first question is whether you intentionally did something wrong. If so, we’ll tackle that later. The first thing you need to do with the auditor when they find something is understand what they were testing for. The odds are good that you provided data that wasn’t what they needed or you don’t have the data they need. This situation can play out in a couple of ways.

First, I recommend that you understand what the auditor’s issue is and see if you can solve it with a simple clarification about what they are looking at. If that fails, see if you can solve it by getting them more data. If gathering the data is a herculean task or is impossible because the data does not exist, let the auditor know that right away, and explain the situation. This happens frequently, especially for companies that are going through their first audit or are working with a new auditor. What you should ask for is an alternative testing procedure. This is very common, and as long as the issue is that data is missing for a logical reason — like not knowing you needed to keep that data — the odds are good that you can get alternative testing. If you can’t, you’ll have to provide the auditor with a whole bunch more data, and things will take a lot longer.

There are levels to this. If you decided not to follow a specific Generally Accepted Accounting Principle (GAAP) guideline, like parts of ASC 606 (revenue recognition), the auditor might accept this as long as you have a rational policy and reason for the decision. Or, the auditor may give you corrective journal entries and guidance on what your accounting treatment should look like going forward.

If you intentionally manipulated numbers with the purpose of making them look more favorable or did something even worse — like committing outright fraud — you need to come clean. It will be better for you in the long run if you are honest and explain what happened. The more you push this off, sidestep the issue or obfuscate, the more the auditor will dig in their heels. There is no good ending here if you try to hide things. The issue will not go away, and the sooner you address it, the more easily and quickly everyone can move on (and hopefully there are not significant consequences).

Auditors are not bad folks and are not looking to cause trouble or “find things.” They want a smooth audit, just like you do. The more you can assist them in making their job easier, the sooner they will be out of your hair.

This article was first published on Forbes Finance Council.