My wife (who works for one of the Big 4) said I should entitle this “Working with Auditors” to send a more positive message.  I thought about that and decided that “dealing” with them is still the more accurate verb when I think of interactions between auditors and management.

On the other hand, I certainly would not put auditors in the category of a “necessary evil”.  They are necessary, but they are not evil (for the most part).  While management is responsible for the financial statements, the auditors are the ones putting a signature on the opinion.  None of us should deny they have a key stake.

f you do any public filings of financial statements or otherwise need an opinion on GAAP financial statements, you have to go through an auditor to get them.  If you don’t mind a frustrating audit or review process combined with needless cycles of inefficient discussions, rework, and/or adjusting journal entries, don’t bother reading on.  However, if you want to continue to improve the process of issuing financial statements, here are a few things I’ve noted along the way that tend to create useful paths of least resistance.

Take responsibility for your financial statements.  The audit opinion states the “financial statements are the responsibility of management”.  I still come across some finance executives that think the best way to deal with an issue is to wait until the auditors find it.  This is poor management, not to mention poor control.  However, don’t let your audit team unduly influence your decision when there is a judgment call to make.  Just because it may be a more aggressive position, this does not mean it is objectionable under GAAP, or even inconsistent with their firm’s official position.

Consult and communicate.  Auditors don’t write those memos telling you how to account for transactions like they used to.  However, what they often do now is publish 3-400 page commentaries on certain topics.  Where you have a complex arrangement, these guides are good sources of more fully described interpretations.  And if the arrangement is so complex (provided the transaction is not yet under audit), get the audit team in a room and discuss the issues.  I have not yet found an audit team that is unwilling to do this.  It is not an internal control issue if management is considering all the potential alternatives of accounting for a transaction.

Own the audit process.  Again, they are your financial statements.  So when you get those extensive “to be prepared by client” lists, ensure they are asking for the right things, and update it yourself for any changes in accounts, policies, or any other matters.  And if you are being held to deadlines of various sorts, ensure the audit team reciprocates the emphasis on when things need to be done.  An audit is just another project that needs to be managed like one.

Find productive counterparts.  If you know there is a complex issue to resolve, don’t start with the junior on the job and let him or her escalate it.  Pick the level of responsibility that is required at the beginning of the discussion (at least senior manager or partner) so that any further escalation to their technical group can be done quickly if needed.

Get them comfortable, and get them out.  This works much better if complex issues are resolved during the quarter as deals come in.  At any rate, at some point, once appropriate decisions are made around accounting methodology, and everything is appropriately documented, the audit of the transaction has to have an end (some people call this “pencils down”).  Once you find the remaining issues in your technical memo are your grammar and writing style, that’s a pretty good sign the auditors have what they need.

Some or all of these may seem obvious, but I still observe many management teams struggling with their audit teams.

If anyone has any other helpful hints, feel free to add them via a comment.

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