How to Avoid Getting Bullied by Auditors

Businesses often dread audits, and rightfully so: they're often incredibly painful and time consuming. Auditors aren't (normally) adversaries, though. If you zoom out, audits are really just about making sure you're mostly doing things correctly. I say mostly because there will be things you're doing wrong, and the points is simply to prove that it isn't pervasive and that others can trust that your businesses is performing the way your financials say it is.

In this blog, we'll cover some audit basics so you can dread them less, and hopefully so you know how to stop auditors from pushing you around.

What is an Audit?

An audit is a process where independent professionals verify the accuracy of your business’s financial reports. Its primary purpose is straightforward: confirming that your financial data genuinely reflects your business activities.

Auditors aren't looking to penalize you—they're checking to ensure you're not inadvertently or intentionally misrepresenting your financial health.

Types of Audits

Audits vary depending on your business size, stage, and needs:

• Financial Statement Audit: Validates the historical accuracy of your financial statements.
• Financial Statement Review: A lighter, less rigorous version of an audit.
• Quality of Earnings (QoE): Used primarily for mergers, acquisitions, or significant fundraising. Focuses on validating sustainable earnings.
• Tax Audit: Ensures compliance with tax regulations.
• Internal Control Audit: Reviews the efficiency and reliability of your internal processes.
• Compliance Audit: Checks adherence to specific regulatory or contractual obligations.

For most private businesses, the Financial Statement Audit and Quality of Earnings audits are most common.

A simple way to think of a Financial Statement Audit is answering questions like this: "you said you had $15M of revenue last year, can you prove it?"

Understanding Audit Procedures

Auditors typically follow several standard procedures. An audit procedures is just a way that they can ask you to "prove it." 

• Inquiry: Asking questions about your processes. ("Can you explain why sales spiked last quarter?")
• Inspection: Examining documentation such as invoices and contracts. ("Can you show me the contracts from your top 5 customers and corresponding invoices?")
• Observation: Watching processes happen in real-time. ("Show me how you enter a new employee into your HRIS system.")
• Confirmation: Directly verifying information with third parties (banks, vendors). ("Hey bank, do you also have what they have?")
• Reperformance: Auditors independently redoing your calculations to ensure accuracy. ("I'm going to redo your work and see if I get the same answer.")
• Analytical Procedures: Evaluating financial data for unusual patterns or discrepancies. ("I'm going to do some data analysis to see if anything pops out.")

What Auditors Can't Do (and Where's the Grey Area)

Understanding what auditors can't demand from you helps in maintaining healthy boundaries:

• Auditors CAN'T:
  
  • Dictate how you perform internal accounting or operational processes.
  • Demand documentation unrelated to the audit scope.
  • Force you to adopt specific accounting practices unless explicitly required by standards.

Signs an Auditor May Be Overstepping

• Requiring you to change your process without explaining why it should be changed.
• Insisting you change accounting methods without clear justification.

How to Respond Effectively

Use clear, respectful phrases to challenge oversteps:

• "Can you explain why this specific document is required?"
• "Can you point me to the regulation or guideline supporting your request?"

What's most important is to get the auditor to articulate what matters and why, and for you to be able to argue why it does or doesn't matter, or how you get comfortable with what you're doing despite it not being exactly what they want.

How to Stand Up for Yourself

Audits should be collaborative, not combative. Here's how you can professionally stand your ground:

• Be Prepared: Clearly document and organize your records.
• Stay Firm Yet Professional: Always ask for clarification or justification.
• Build Rapport: Establish a respectful dialogue to create mutual understanding.
• Understand Materiality: Focus discussions around what genuinely matters to your business.

Positive Outcomes from Standing Your Ground

• Clearly defined expectations.
• Reduced unnecessary workload.
• Improved respect and smoother future audits.

Potential Downsides

• Excessive pushback without clarity can prolong the audit, potentially increasing your costs if your audit fees are hourly.
• If you fight auditors unnecessarily, and/or push back against legitimate issues, you could strain your relationship with the auditor.

Key Takeaways

• Audits confirm the accuracy of financial data; they're not inherently adversarial.
• Different audit types apply at various business stages.
• Auditors have clear boundaries and guidelines they must follow.
• Professionally standing your ground can significantly improve your audit experience.

When you’re informed and prepared, you won't get bullied by auditors—you’ll collaborate with them to achieve a smooth and efficient audit.

Need help navigating an audit?

Connect with John or Kyle at Zeroed-In Consulting. They're experts with technical accounting, audit readiness, outsourced accounting, and transformation with past experiences that include auditing private and public companies.

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