The Auditors are Coming! The Auditors are Coming!!

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 13^th 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:

·        TheEngagement Letter

·        InitialPlanning Meeting – Accounting Department and the Auditors

·        Preparingthe “Audit Binder”

·        TheManagement Representation Letter

·        The Final, Final Financial Statements and Opinion Letter

·        TheAuditors’ Recommendations Letter

·        TheFinal Meeting