ASC 842 Transition Guide

Watch out: Top focal points for audit season

by | Dec 30, 2022 | Articles, Auditing, Lease Accounting

This article, "Watch out: Top focal points for audit season," originally appeared on AccountingToday.com.

Summary provided by MaterialAccounting.com: Are you ready for audit season? This article explores top tips for upcoming audits, including potential trouble spots. 

As companies look ahead to audit season, it’s more important than ever to stay aware of the major ongoing challenges stemming from today’s reshaped workplace dynamics.

Accounting and finance teams continue to struggle with pervasive staff resignations or reshuffling, which spurs downstream impacts from project management to task execution. Auditors are facing similar human capital issues, with new or not enough people to ensure audits are executed accurately and seamlessly. Meanwhile, the IPO boom of recent years and the continued high deal volume are impacting an array of organizations now facing complex accounting and auditing problems, often with in-house teams lacking the previous experience to tackle these challenges efficiently.

It’s no wonder, then, that many in the field are facing audit season with more than the usual level of stress. But with proactive collaboration and the right processes in place, in-house professionals can alleviate some of these issues and chart a less challenging course, both for themselves and for auditors. Here are some strategic points that accounting and finance teams should keep in mind in order to make audit season go more smoothly, including potential trouble spots unique to this year’s audit cycle.

1. Be proactive

Effective accounting and finance teams will approach each audit with a proactive mindset, although preparedness remains especially important this year given that many organizations are facing significant change.

A proactive approach starts with upfront planning discussions with auditors surrounding management’s risk assessment. These discussions are the company’s opportunity to articulate where management believes higher risks exist and where audits should focus regarding locations, accounts and transactions. Conversely, management teams should provide their perspective on any areas where the risk profile may have changed from prior years.

For instance, if a company launched a new revenue stream in 2019, and the company has compiled three years of history to validate assumptions or judgements incorporated into the accounting, then management could argue that the revenue stream should no longer be considered high risk. This proactive discussion could eliminate unnecessary audit efforts related to that revenue stream.

Additionally, company professionals should take it upon themselves to align on delivery dates for needed data, and commit to timely, but realistic, turnarounds. Although deadlines may be meant to motivate, too aggressive timelines can cause delays or rework if the in-house team fails to meet those milestones, as auditors depend on this information when planning their resources and staffing.

If a company is significantly under-resourced, leaders may also want to proactively engage interim support to meet the pressing needs of the audit cycle. Any interim engagements should keep an eye toward the future, so that in-house teams can glean related learnings from outside assistance and carry forward any best practices learned during the audit cycle into ongoing accounting and finance operations.

Being proactive also means that internal audit teams coordinate with independent auditors to ensure similar sample selection methodologies and consistent testing approaches. This alignment maximizes the auditors’ ability to rely on the company’s work and enables auditors to validate the effectiveness of internal controls more easily.

The role of third-party service providers should be aligned through proactive project management as well. Because of the increased complexity of integrations, companies often work with a number of firms, from valuation specialists and providers of cloud services to legal or tax advisors. It will alleviate last-minute difficulties if these third parties commit to providing their deliverables with enough time for management to review and accept the findings before passing them on to the audit team. It’s always better to get one report per week over six weeks, rather than six reports all in the final week.

2. Make sure the process of change is evaluated

Significant changes — such as acquiring a new business or implementing new technologies — can be transformative for organizations. These changes impact accounting and finance teams, and leaders should put the right processes and controls in place so the impact of the change itself is properly addressed.

For example, an organization that may not have had significant acquisition activity in the past may now be facing a business combination. An acquired entity must have appropriate internal controls over its financial reporting, but it’s equally important to consider and employ controls that ensure proper accounting for the acquisition transaction itself. Controls related to valuations are one example. Here, the company’s processes should ensure that the information provided to valuation specialists is complete and accurate and that the valuation reports are reviewed in detail by accounting and finance leaders.

Similarly, a new system implementation may lead to a more automated, better controlled environment, but the transition period itself causes risk to arise. Company leaders should ask whether proper controls exist regarding the system implementation — from data migration to user acceptance and provisioning. Technology implementations are often complex and span months or even years. Ensuring this process is appropriately controlled throughout the implementation process itself supports an effective internal control environment — which, in turn, makes an audit cycle more seamless.

3. Anticipate potential trouble spots 

In addition to the strategies mentioned above, company leaders may also want to engage advisors that can provide targeted guidance for any unique accounting scenarios and, where appropriate, leverage third-party assistance in facilitating collaboration with auditors. Companies should especially be mindful of these areas that merit extra attention in the coming audit cycle:

  • Lease accounting. Calendar year-end private companies are required to adopt the new lease accounting standard (ASC 842), effective for 2022. Even for organizations with a limited number of leases, the effort required to ensure completeness of the lease population and create transition entries may be more than anticipated. Accounting teams should not underestimate the time it will take for either a manual calculation or to implement a system solution.
  • Debt and equity financing. Although the pace of IPOs slowed significantly in 2022, the volume of financing transactions didn’t miss a beat. Organizations have gotten more creative in crafting these agreements, resulting in complex accounting situations that in-house teams should assess as soon as possible. Companies need to ensure they have the proper technical acumen and review of these analyses and provide timely memorandums on any issues to their auditors, as these issues typically require a longer lead time for review by the national office.
  • Impairments. As economic volatility continues into the fourth quarter, companies should be mindful of any changes that may be considered a trigger for an impairment analysis over long- or indefinite-lived assets. Accounting teams should look out for triggers that may come in many forms, including a forecasted reduction in sales in a specific region or for a specific product or board approval of a restructuring plan.

Leading an organization through audit season has never been easy, but today it is even more fraught with risk, making it imperative for company teams to be focused on how they contend with the constraints of the 2022 audit cycle. By enacting a collaborative and proactive approach, in-house professionals will be better positioned to navigate audit season with smoother processes and more accurate results.

ASC 842 Transition Guide

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ASC 842 Transition Guide