Friday, March 9, 2012

The Audit Binder

Parsley Sage Rosemary & Ginsburg llp

“always a reasonable result for a reasonable fee, always”


Accounting Department


Mike Marget


March 9, 2012


The Auditors are Coming!  -- Audit Binder

Good meeting yesterday with the auditors from Beane & Beane, CPAs.  The following are my notes from the meeting concerning the Audit Binder.

The Audit Binder is nothing more than the assemblage of all the materials we need to produce for the auditors so they can begin, then complete their work.  The term “binder” – as you probably gathered – is a bit of a misnomer since they prefer most of the information be presented in spreadsheet formats or as PDFs in the case of documents.  The “audit jump drive” might be a better name for the thing (remember, you read it here first, but it is unlikely to catch on.)

Here’s what we should be prepared to include in the Audit Binder, subject to further instructions from the auditors that some of this stuff can be skipped or reduced in quantity:

1)     Trial balance showing current year-end numbers opposite prior year numbers;

2)     Draft financial statements – the one’s we prepared as of year-end this year and last, with an explanation of significant category or account balance variations from year-to-year;

3)     Copy of the general ledger for the year;

4)     Copy of the firm’s policies and procedures manual, with any changes from the prior year highlighted;

5)     Memo explaining any changes in the accounting system (e.g., new software) or changes in how we process transactions or reflect transactions in the general ledger or financial statements. 

6)     PBC (Prepared by Client) Schedules:

a.      Copy of all bank account reconciliations for the year;

b.      Subsidiary ledger detailing trust account balances and activity for the year;

c.       Subsidiary ledger detailing client retainer balances activity for the year;

d.      Aging of work-in-process fees, expenses and costs advanced;

e.      Aging of accounts receivable;

f.        Capital asset additions and retirements, with depreciation lapsing schedule;

g.      Accrued liabilities as of year-end, including profit-sharing/401k contributions payable;

h.      Detail supporting all other asset and liability accounts;

i.        Schedule detailing changes in partner capital accounts;

j.        Copy of the budget for the year just ended;

k.      Copies of prior year-end tax returns, Forms W-2, 1099 and draft K-1s;

l.        Summary of all financial-related loan covenants, including ratios indicating the firms compliance;

m.   Analysis of payments made to outside lawyers; and

n.      Summary of outstanding litigations involving the firm as a party.

7)     Transaction documentation – it is not uncommon for the auditor to select certain invoices, vendor disbursements and expense account distributions for review during field work;

8)     Tax information:

a.      Signed copy of the most recent tax return;

b.      Draft copy of the current year’s return or information;

c.       Any correspondence between the firm and federal, state or local taxing authorities;

9)     External verification letters:

a.      Letter(s) signed by an authorized bank account signer directing banks to verify year-end account balances directly to the auditor’s mailing address;

b.      Letter(s) to outside counsel, signed by a member of the firm, directing counsel to write letter to the auditor concerning potential loss contingencies;

10)Firm documents:

a.      Most recent partnership agreement and other governing documents;

b.      Minutes of Management Committee meetings;

c.       Copies of any new merger or later hiring agreements;

d.      Copies of any new loan agreements, equipment or real estate leases, or other significant agreements made or modified since the prior year; and

11) Information as to Changes in Firm Management or Structure:

a.      New member of the Management Committee;

b.      Any changes in key administrative or accounting personnel.

I know this looks like a daunting list, but all of the information is or should be at our fingertips.  We can meet again next week and assign tasks to get all of this material gathered and organized in advance of the auditors’ arrival.

Our goal is to keep ahead of the audit work; anticipate their needs; keep them busy at all times (not waiting for us); answer their questions; and eventually get them packed up and out of the office as quickly as possible.  We can do this!

Monday, March 5, 2012

Initial Planning Meeting with the Auditors

Parsley Sage Rosemary & Ginsburg llp
“always a reasonable result for a reasonable fee, always”

Accounting Department
Mike Marget
March 5, 2012
The Auditors are Coming!  -- Initial Meeting with the Auditors

We have scheduled the initial meeting with this year’s audit team from Beane & Beane, CPAs for 3:00 pm on Thursday, March 8th, in the Peter Parsley Memorial Conference Room. 

The purpose of the meeting will be to accomplish the following:

1.      Introduce the key personnel on both sides;

2.      Schedule the starting date and ending date for the auditors’ field work (i.e., the days they will be in our offices);

3.      Determining the milestones/delivery dates for various schedules that will make up the Audit Binder (i.e., all the stuff we need to provide to them);

4.      Discuss the status of the suggestions included in last year’s Auditor’s Recommendations Letter (i.e., whether we implemented last year’s suggestions);

5.      Exchange information with them regarding any changes in the law firm’s operations and any new work required by them which we didn’t prepare last year;

6.      Establishing the deadline for them to produce for us a listing of proposed adjusting journal entries, deliver a draft of the complete financial reporting package (all schedules and opinion), complete the firm’s tax return and K-1s for the partners, and discuss items which might be included in this year’s Auditor’s Recommendations Letter; and

7.      Scheduling the Final Meeting between the Auditors and the Management Committee.

Let me know if you have any questions, and plan on being there next Thursday.

Friday, March 2, 2012

The Audit Engagement Letter

Parsley Sage Rosemary & Ginsburg llp
“always a reasonable result for a reasonable fee, always”

Learned H. Sage, Managing Partner
Accounting Department
Mike Marget
March 2, 2012
The Auditors are Coming!  – Engagement Letter

 We have made all of the final accounting entries for 2012, subject to examination of the financial statements by our independent accounting firm, Beane & Beane, CPAs. 

Attached is a copy of their formal Engagement Letter.  I’ve already negotiated the fee with them – no increase again this year, but the Accounting Department is going to prepare a couple extra schedules which their staff used to create from scratch in the past.  It’s a fair trade.

The letter is not dissimilar to the engagement letters PSRG uses – except Beane & Beane insists upon us signing it before they begin work and the payment schedule is outlined in detail.  (Things we should consider getting stricter about.)

As a technical matter, Beane & Beane should be formally retained by the firm’s Management Committee.  Accordingly, I will put this subject on the agenda for this month’s Management Committee meeting and attach a copy for everyone to review.  The minutes of the meeting should reflect the Committee’s action.  It is something the auditors look for when they review the Committee meeting minutes each year.

Let me know if you have any questions.

Thursday, March 1, 2012

The Auditors are Coming! The Auditors are Coming!!

Parsley Sage Rosemary & Ginsburg llp
“always a reasonable result for a reasonable fee, always”

Accounting Department
Mike Marget
March 1, 2012
The Auditors are Coming!  The Auditors are Coming!

I heard the commotion in the hallway yesterday and at first misconstrued the words, “The auditors are coming; the auditors are coming,” as shouts of joy.  Yes, that was my mistake; accountants are seldom greeted in that fashion.

The auditors ARE coming.  Nevertheless, I want to assure all of you: there is nothing to fear but fear itself –except for maybe zombies, but there is nothing to fear from certified public accountants.

The purpose of this memo is to put everything into context concerning the upcoming annual visit from our outside accounting firm, Beane & Beane, CPAs.

I cannot deny that audits are sometimes intrusive and time-consuming experiences.  It doesn’t have to be unpleasant.  The key for all of us in Firm Administration, and in the Accounting Department in particular, is simply to be prepared for the audit.  Successfully navigating the audit process is a major job responsibility for all of us.  Planning is essential.  The first step is a thorough understanding of our role in the process, the auditor’s responsibilities, and the materials needed for them to complete their tasks on a timely basis.

In furtherance of this effort, I am preparing a series of memos to help us better understand the audit process and what we need to accomplish to be prepared.

Why does a Law Firm Need an Audit?
Audits are usually associated with public companies and the financial statements required for shareholders and the SEC.  There is nothing in the law or the ethical rules that require an audit.  Nevertheless, law firms may want or need their financial statements examined by an independent auditor for any number of reasons, including:
·        A partnership agreement provision requiring it.
·        A covenant in a bank loan agreement.
·        To provide evidence of credit worthiness for an office lease or equipment financing.
·        It is a good business practice.

Audit vs. Review vs. Compilation
Not every examination of financial statements by auditors is an audit, but the independent accountants who perform this type of work are usually referred to informally as “auditors.”  The technical terms for the types of examination they perform are an audit, a review or a compilation.  The amount of work the auditor must perform (and, consequently, the cost and the amount of effort required from the Accounting Department) varies depending upon what type of financial statement examination they have been asked to perform. 

With a formal audit, the auditor provides a written assurance that the financial statements fairly present the financial position of the firm in accordance with generally accepted accounting principles.  In order to express such an opinion, the auditor utilizes various analytical techniques to test procedures, to examine transactions and documents, obtain independent verification of numbers with outside parties and interviews various people in the accounting department and firm management.  It is a time-consuming, and hence expensive, task to do all the testing and other procedures needed to assess the firm’s internal controls, fraud risks and financial documentation.

A review provides a lesser level of assurance to the eventual readers of the financial statements as to their accurate portrayal of the firm’s financial statements than an audit does.  Since the review provides limited assurances, the auditors’ work is less extensive – lesser amount of testing and analysis – and is less expensive than a formal audit.

A compilation – as the name suggests – is a process whereby the auditor simply assists the firm in compiling (or formatting) its financial data into typical financial statement form.  A compilation typically involves little, if any, analytical procedures beyond that necessary to verify the financial statements are free from obvious material errors. 

It is important to understand the distinction between these three types of services.  If your firm’s loan documents specify a review of the financial statements, an audit will suffice (but is excessive), but a review will not take the place of an audit unless the lender waives the requirement in advance.

The Accounting Department’s Role in the Audit
The annual audit process is an opportunity for the Accounting Department to shine.  This is our moment.  We need to view the audit process as the vital 13th step in the firm’s annual financial reporting cycle.  The first 12 steps are the financial reports we produce each month.  The auditors’ examination is the culmination of the work we’ve already done.  It should be our crowning achievement for the year.

If you don’t buy into the previous paragraph, then look at it this way:  The audit is inevitable, so we should make the most of it.

The audit can and should be managed by the Accounting Department to our advantage.  Over the last 12 months we have prepared financial reports, work-in-process and accounts receivable aging information and a myriad of other data used to manage the law firm.  We’ve worried about internal controls and things (not) slipping through the cracks.  We’ve done our jobs!  The audit provides an opportunity for our work to be evaluated and praised by an outside party – someone who knows how difficult it is to do our jobs.

The audit process can be a positive or negative experience depending upon our level of preparedness before the auditors arrive and our ability to work in partnership with them.  Our goal should be to get them everything they need as quickly as possible and then get them out the door.  Good planning goes a long way toward establishing the essential working relationship needed to accomplish this.  Preparation saves time, frustration and money and can transform the audit into something manageable, and if not pleasant, at least tolerable.  We can work together (and with the auditors) to accomplish that. 

Next steps
Over the next few days, I’ll be documenting all the things we need to do in order to be ready for the audit from start to finish.  These supplemental memos will cover:

·        TheEngagement Letter

·        InitialPlanning Meeting – Accounting Department and the Auditors

·        The Final, Final Financial Statements and Opinion Letter

·        TheFinal Meeting