June 22, 2018

How Accounting Teams Can Avoid the Year-End Audit Scramble

Webster’s defines the word “scramble” as “to move with urgency or panic.” If you want to see a scramble in action, turn on any college football or NFL game and watch the quarterback try to elude several angry 325-pound defensive linemen.

While accounting and finance teams don’t have to worry about large, angry auditors chasing and tackling them during the year-end audit process (at least we hope not), many have to scramble to gather the necessary documentation and files, often housed in several different areas, to avoid being hassled by those inspecting the company’s books.

“Pulling all the information the auditors require, in the format they require it in, takes a lot of time,” said Jedannah Vieira, CPA, director of accounting operations at VSCO, an Oakland, Calif.-based art and technology company. “Auditors typically ask for hundreds of reports and data points. Some requests take five minutes to complete and send over; others take days or weeks to prepare.”

Complications to being audit-ready

Startups like VSCO are often at a disadvantage for larger projects because they have smaller accounting and finance teams. As a result, audit preparation requires advanced planning and additional man-hours.

“Complicated areas of accounting, like revenue recognition and stock-based compensation, require significant review of accounting policy and analysis, complicated estimates, and conclusions that align with U.S. GAAP and best practices,” Vieira said. “At VSCO, we hold ourselves to similarly high standards of reporting, but we need to be lean and efficient with the resources we have to manage and deliver exceptional results from our accounting practice.”

Another area in which Vieira’s team works hard to finish tasks ahead of time is the close and reconciliation process, which is an important piece of the year-end audit equation.

“We aim to take as much out of the financial statement close process as possible by front-loading work. We also aim to be smart about utilizing estimates so that we can close select accounts in the most efficient way possible,” she said.

Prior to Vieira joining VSCO’s finance team, the company did what many other organizations do: rely on an Excel checklist to document and manage the close process.

“Accounting teams have survived for too long without proper tools to manage the close process. Spreadsheet checklists are stop-gaps. Even in the best scenarios, they add more tedious work than create value. Time is incredibly limited in any finance team, small or large, so all efforts need to be focused on value creation,” Vieira said. “I felt strongly that we needed a smart way to track our close process on a monthly and yearly basis, and that as a team we all needed to have visibility into the status, completeness, and appropriateness of our close process.”

Checklist dilemma

More on VSCO in a bit. Let’s shift gears to another company that also was having a checklist dilemma, which hindered its close and audit readiness. Vets First Choice, a Portland, Maine-based provider of technology-enabled healthcare services for veterinary practices, has 12 contributors to the close process, some of which are located in different states, according to Reporting and Accounting Manager Kristen Parisien.

A comprehensive close checklist hadn’t been created; instead, some contributors created their own checklists, in various forms, that weren’t easily accessible. Others had no checklist at all.

“There was no consistency around where reconciliations or documents were saved, who completed them, who reviewed them, or when they were considered complete,” said Parisien, who is responsible for ERP administration, all closes and audits, and financial reporting at Vets First Choice. “It’s hard to manage when you have contributors in multiple locations, working on different networks and drives, and responsible for different tasks.”

While auditors didn’t have much difficulty getting the documents they needed, Parisien said, it was at the expense of staff members who put in extra time and effort to gather all the right documents, from the right places.

“Version control was always a struggle,” she added.

As a result, it took 14 days on average to close the company’s books each month and more than a month to close out the year.

“Numbers are constantly changing throughout the close, and if we are not in sync, things get missed, overlooked, or unaccounted for,” Parisien said. “We had to do something different since we are a rapidly growing company. We needed a simpler solution where everything is contained in one place.”

All for one, and one for all

That all-in-one solution ended up being close management software from FloQast, which Vets First Choice implemented in January 2016.

The result? Vets First Choice is down to a five-day month-end close and a seven-day year-end close.

“FloQast has streamlined our balance sheet reconciliation process, giving deadlines for each preparer and reviewer, while always ensuring those reconciliations tie to our ERP system,” Parisien said. “It’s so much easier to see what deadlines we’re bumping up against, and it’s constantly highlighting areas where we can be more efficient and who or what the bottlenecks are in the process. It also shows how well we complete our closes. These successes are important feedback for the contributors.”

“It has been important for me to condense the close and maximize productivity, while maintaining a high level of precision,” she added.

What about checklists? “FloQast provides a baseline checklist, and it was easy to add items and modify as we went through our first few closes. It was a great exercise to document everyone’s responsibilities,” Parisien said. “It also forces all of the contributors to be on their toes in completing and signing off on their checklist items and reconciliations.”

As mentioned earlier, Jedannah Vieira of VSCO was looking to add visibility into the close process. FloQast did just that, starting in the fourth quarter of 2016.

It really helps leadership understand the quality and completeness of the monthly and yearly close processes. Without it, I would put in much more effort to have the same amount of visibility into the status of the close. I’d be meeting with the team daily to understand the status of items. We can now skip the status meetings and focus on getting the work done together,” she said. “It also allows me to participate in the process and document my monthly review and commentary. It also allows our team to demonstrate the rigor of our close process to auditors who want to review it. And finally, it helps all team members rally around the common goal with consistent information, which is energizing.”

In addition, FloQast provided Vieira a way to implement documented controls over the close process and reconciliations.

Our operation is paperless, so we don’t retain paper accounting files with signature sign-offs. We also don’t have our own software or system to document internal controls. Because of these reasons, a tool like FloQast helps us efficiently and effectively document and validate processes and controls,” she said.

Learn strategies and best practices for automating and improving the month-end close process at your organization during this webinar presented by FloQastYou can read more about Going Concern’s partnership with FloQast here.

Image: iStock/stevanovicigor

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Non-Profits Are Feeling the Pain

WSJ has a Monday piece “Once-Robust Charity Sector Hit With Mergers, Closings” (the Recession Forces Nonprofits to Consolidate) that may be found here. It tells the story of a “homeless” woman with terminal lung cancer and a charity no longer able to afford to help her out. Sad.

When one charity’s COO says “we’ve had funding cut after funding cut, and we never know when the next shoe is going to drop,” that is a bad sign.

Hit by a drop in donations and government funding in the wake of a deep recession, nonprofits—from arts councils to food banks—are undergoing a painful restructuring, including mergers, acquisitions, collaborations, cutbacks and closings.

“Like in the animal kingdom, at some point, the weaker organizations will not be able to survive,” says Diana Aviv, chief executive of Independent Sector, a coalition of 600 nonprofits.

I saw that on the Discovery Channel and it wasn’t pretty.

Note: the Service says the value of your blood is not deductible as a charitable donation but cars are. As of 2005, cars are only deductible at FMV, not Blue Book. Damn you, fair value, foiled by the free market again!

Blame the Service for tightening its charitable donation rules at the worst possible time? Not sure on that one. While you’re reluctant to donate your $200 Toyota (ha) to charity because you could have claimed $2,000 under old rules, find some comfort in the fact that (alleged) terrorist “non profits” can not file for 2 years and somehow get away with it. You wonder why I advocate fixing the system from the ground up?

You can text $10 to Haiti but what about the “Economic Homeless” here in America? asks Young Money.

If this were a survey and you asked me “What do you think the IRS could do to encourage charitable donations?” I would answer “Tax breaks. It isn’t the Treasury’s job to distribute bailouts.” Yet they continue to behave as though it is their duty.

See the problem yet?

Hallelujah! Church Accounting Miracles!

I had no idea how much a minister can make but now I do. Wait a minute, this just tells me how to bypass Service rules by writing checks in the church’s name. I might totally be in the wrong line of work.

Free Church Accounting (I’m not kidding) brings us a question from “Sharon” of Corsicana, Texas:

How much money does a minister have to make in order for money to be reported?

I started my church back up after 12 years vacancy. I do not have very many members. Right now we are 3 active members and other people stop in from time to time. I do not actually receive money. Since the church is striving I use the money to pay the light bill, get the grass moved.


Answer:

According to the IRS website, “Earnings of $400 or more are subject to self-employment taxes.” (that includes qualifying ministers)

If you are a church employee, income of $108.28 or more is subject to SE tax.

It would be better for you, if you opened a checking account in the church’s name and paid expenses out of it. If that’s not possible, just make sure and keep all of the receipts that show where the church funds are going.

Fascinating! I took the preliminary “Are You a Tax-Exempt Church” quiz on their website and failed miserably so I guess I’d make an awful 501(c)(3) but that’s probably for the best.

There are ways to fail at this of course, like the Spokane, WA priest who couldn’t keep his arms and legs (and other parts) inside of the vehicle at all times, financial mismanagement in the University of North Carolina system, and JDA favorite the University of Colorado’s wild credit card user with horrible hair.

I would never imply that more regulation is the answer; I’m merely pointing out that there’s a bit of work to be done in identifying non-profit fraud. Seriously, how can one detect fraud when the core basis of fund accounting is an imbalance between “expenses” and expenditures?

The Church of Jr Deputy Accountant Scientist? I’m down.