Working Together to Achieve Success: The CFO and the Auditor

When a medical supply manufacturer launched into a transition from its legacy accounting system to a new fully integrated ERP system, the CFO and her accounting team had an opportunity to redesign the transaction workflow and a challenge to design automated processes through the new ERP. For the CFO, the streams of transactions, required data elements and enhanced reporting were top of mind in the configuration.

To preserve the integrity of the financial records throughout the implementation, the CFO maintained a fluid collaboration between the company’s finance team and its external auditor. As the implementation progressed, the external auditor worked with the accounting team to ensure that transactions would be recorded and reported consistently and accurately, control activities for initiation, authorization, coding and reporting were preserved and historical balances were validated. When questions related to accounting processes arose, the external auditor offered reassurance or cautionary feedback that helped improve the company’s overall financial processes, accuracy and reliability.

In a year that required maintaining two separate financial reporting systems, this proactive, intentional approach laid the groundwork for a successful annual audit and saved significant time and expense down the road.

This is just one example of how those driving the change to a new system — the CFO and accounting team — and the external auditor can work together constructively and collaboratively even though they have separate and different roles.

A Collaborative Journey

Throughout the year, as the CFO and accounting team carry out their responsibilities, the auditor can be at their side, providing critical guidance and direction. Auditors can maintain independence without having to be standoffish; their role is not only to test, but also to teach.

These practices culminate with preparation for the annual financial audit. Trust and open communication can make the annual audit less intimidating and more focused on continual improvement. The audit is an opportunity for the CFO and accounting team to demonstrate their knowledge throughout the year as they record transactions and for the auditor to validate and publicly affirm the reliability of their processes. The auditor offers validation by affirming the results.

So what does it take to create a collegial, productive relationship between the CFO and accounting team and the auditor as they engage in the process that culminates with the annual financial audit?

The Value of an Audit

Every entity engages in financial reporting to provide useful information to its board and the management team; to facilitate rational planning, capital investment, debt and similar decisions; and to assess the amounts, timing, and uncertainty of prospective cash receipts from all revenue streams and investment returns. The financial reports provide information about the entity’s economic resources, claims on those resources, and the effects of transactions, and events and circumstances that change its resources.

An effective financial audit:

• Independently and objectively evaluates the financials, internal controls and compliance
• Identifies control deficiencies, significant deficiencies, or material weaknesses
• Provides information to peers in the industry and access to experts on governmental accounting
• Offers knowledge and training opportunities
• Increases transparency and confidence from board members, stockholders and lenders

Begin With Trust

The relationship between the CFO and the auditor is most effective when it starts from mutual respect and collaboration. Auditors must be careful to seek documentation without the presumption of error or seeming to make accusations. They are looking for internal controls and consistent execution for the initiation, recording, reconciliation and reporting of financial transactions.

It is natural for accounting staff to feel defensive when the audit team comes seeking proof and documentation, or asking about possible missing control steps, but remember: it is not personal. Auditors should be tactful, and accounting teams can help by remembering that the audit is about processes, not people.

The key is to recognize that each group plays a different role and has a different objective, but they are all working toward a common goal. The CFO and accounting team record and document financial transactions, while the auditor offers support and guidance. The end result is an audit that lends confidence to the organization’s work and validates the results.

The Nuts and Bolts: What to Expect From the CFO and Accounting Team

The accounting team’s responsibility is to have useful financial reporting based on the activity that has occurred all year long. Data comes into the accounting department from many different sources, and the accounting team has to make sense of it all. They must aggregate data, reconcile transactions and tie balances back to transactions of significant accounts. In addition, accounts and transactions must be structured in compliance with GAAP and if a public registrant, PCAOB.

Each transaction makes a journey from initiation through authorization to reporting, and that journey is what the auditor must validate, based on how transactions were processed and recorded. The auditor verifies the financial reporting presentation by going back and reviewing the framework of transactions, account balances and assertions.

CFOs generally trust their accounting team and colleagues, knowing how much work went into processing and documenting tens of thousands of transactions each year. When the auditors start asking questions, it may feel like they do not recognize the level of effort and diligence everyone put in.

What the Auditor Looks For

When validating financial data, the auditors recognize the CFO’s and team’s competence, but they must still gather empirical evidence to document the completeness and accuracy of the transactions and balances. Auditors are tasked with documenting that the information has been validated at its source, analyzed, reconciled, and reported accurately and completely.

The auditor is looking for certain characteristics of effective financial reporting. These include:

• Relevance: The auditor evaluates the potential effects of past, present, or future transactions or other events on future cash flow to confirm or correct previous evaluations, making information available to decision makers in time for them to adjust course when necessary.
• Faithful Representation: The information must be verifiable, neutral and complete. “Verifiable and neutral” means the information does not have a material error or bias or that the recognition or measurement method has been applied without material error or bias.
• Comparability and Consistency: Information is presented in a way that enables users to identify similarities and differences between two sets of data — for example, across multiple years for one county, or across counties. Comparability requires use of the same accounting policies and procedures, such as GASB and state financial standards.
• Understandability: Information is classified, characterized, and presented clearly and concisely.

Beyond verifying the accuracy of the balances, the auditor must validate how internal controls were designed, how consistently they were followed and how well they worked to establish the necessary level of certainty over management’s assertions.

Why Internal Controls Matter

Modern accounting departments rely on multiple, disjointed systems to process and record transactions. As complexity increases, so does reliance on comprehensive, well-designed, well-maintained internal controls, from segregation of duties to user access controls to accounts payable reconciliations. Those controls are part of what the auditors are there to verify.

For example, in looking at an organization’s IT ecosystem, the auditor needs to understand which IT risks may affect the records, transactions and financial results being reported. Key attributes and risks the auditor should consider include:

• Complexity of systems and data sharing
• Interfaces, data sharing and integration of applications
• Changes to systems or implementation of new systems
• Volume of transactions
• Number of users (internally and externally)
• User access design – role-based security and how those roles are assigned to employees to maintain segregation of duties
• Automated calculations and evidence of validation and reconciliation
• Key reports or other output

Auditors ask for information on IT and other controls not to be intrusive or find fault, but in order to provide objective, substantive support for financial reporting. In addition, if a public registrant, these internal control assessments are required under Section 404 of Sarbanes Oxley.

Making It Work by Working Together

The most successful financial audits begin and end in a spirit of collaboration and trust. When the CFO and accounting team are working in synch, the entire process will run more smoothly and the quality of the audit will be better. The CFO and staff are more likely to save time and money that can be put to other uses.

That is why it is so important to lay a strong foundation for success during the process of selecting an external auditor. Pay attention not just to the qualifications of the audit firm but to those of the audit partner and team that will actually do the work. Make sure they have a good understanding of the entity and, ideally, experience with similar organizations. An audit team that works with other counties can bring best practices to your county, as well as helping you avoid mistakes that have been made elsewhere. Most importantly, make sure the audit partner and team are committed to open, honest and frequent communication.

Effective financial reporting, strong internal controls and solid processes for gathering and reporting data will put the organization in a position to provide a quality product to the board, investors and lenders not just for one year, but well into the future.

As they go through the journey together, the auditor can increase confidence by showing that the information they are providing is the best, most complete reflection of the organization’s activity. The more everyone prepares, communicates and collaborates, the better the process will go.

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