Parsley
Sage Rosemary & Ginsburg llp
“always a reasonable result for a
reasonable fee, always”
MEMORANDUM
To:
|
Accounting
Department
|
From:
|
Mike
Marget
|
Date:
|
March
1, 2012
|
Re:
|
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.
Teamwork
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:
·
InitialPlanning Meeting – Accounting Department and the Auditors
·
The
Final, Final Financial Statements and Opinion Letter
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