Getting Your Audit Ducks in a Row

Transcript: Nick Dolik:                                  Alright, everyone, thanks again for joining our founder session this week. For those of you who don't know me, I'm Nick [Dollick 00:00:05]. I head up our growth and partnerships here at Nomad and with me is Brian Minkel. Thanks for joining, Brian. Brian Minkel:                    Absolutely. Nick Dolik:                                  This week is audit prep ensuring the house is house is in order with Brian Minkel, so we'll dive right in. Thanks for joining here again, Brian. Brian Minkel:                    Glad to be here. Nick Dolik:                                  I know you've been here. Let's just get a brief refresher on background, how you got to Nomad, all that good stuff. Brian Minkel:                    Yeah, absolutely. I'm currently the manager/director here at Nomad for the accounting group. Prior to that, I was a controller here at Nomad, and before that, I worked in public accounting for over six and a half years both on the audit and tax side on a wide range of industries, and I also currently hold and maintain a CPA license with New York State. Nick Dolik:                                  Nice. To dive a little deeper, what makes you passionate and what makes you appeal to the tax startup community, all that? Brian Minkel:                    Yeah, absolutely. I think the biggest thing is that we're helping a lot of companies focus on their products or services that they might not necessarily be well-versed on the accounting side, and that's where we come into play and we can help alleviate that pressure where they focus on the front end and they leverage someone like us so that they have their accounting and finance and tax needs in order. Nick Dolik:                                  Yep, couldn't agree more. To dive into the subject of the week, one of the services we offer, as you know and as you've been through, is audit prep. For founders who have never gone through an audit, Brian is a lead on that for a lot of our clients here. You want to give us a quick breakdown of what a company audit looks like, overarching goals, purpose of it? Brian Minkel:                    Yeah, absolutely. I'd say from a general perspective, an audit consists of Q&A, documentation, testing, and financial reporting. You can consider the auditor as an independent party that will opine on the financial statements and give an opinion based on their outside perspective through various Q&A testing, things of that nature, all under the umbrella of GAP, which is Generally Accepted Accounting Principles. The goal is essentially to get that unqualified opinion. I think that's what everyone is striving for, but also the driver may vary, but essentially, the purpose, I would say, is to give that assurance on the financial statements for the end user and the reader of those statements. Nick Dolik:                                  Great, great, and you touched on a little bit there, but the four different conclusions results from an audit. You want to give us a brief explanation of what conclusions you would need? Brian Minkel:                    Yeah, yeah, absolutely. As I said, the unqualified opinion is what everyone wants. That means it's a clean report. No issues noted, or at least any issues are immaterial. Then, there's three other levels. You have your qualified opinions, your disclaimers, and then your adverse opinions. Qualified comes into play when there's so items that, whether it's auditors and management disagree on the treatment of different transactions or approaches within the accounting realm, or if there's some scope limitations, but not significant enough to give the two latter opinions.                                                   The next one would be a disclaimer and that's when they actually can not give an opinion, so they actually disclaim on the opinion all together, so that's not that beneficial, either, so essentially, you're getting a set of financial statements without them saying yes or no whether or not they say they're in order or not. That can vary greatly, as well, but it's essentially based on the fact that there was some scope limitations or disagreements on the visibility of what was available to be tested.                                                   Lastly, you have your adverse opinions which nobody wants ever. Essentially, that means that there's some material issues that couldn't be resolved upon the issuance of the report which would then trigger, unfortunately, an adverse opinion. Nick Dolik:                                  Got it. Great. Circumstances or situations that companies go through or are sometimes required to go through an audit. You want to dive into a little bit of that? Brian Minkel:                    Yeah, absolutely. I'd say an audit is typically triggered or driven through your investors, your board members, or perhaps banks or lenders with particular convenance that need to be met. All that goes around the assurance that they're getting a set of financials that are in accordance with GAAP, so whether it's a bank testing it to meet whether they met or didn't meet certain convenance, they know that when they're getting those audit financial statements, they can rely on those numbers and then they can officially determine whether or not those covenants were met.                                                   Same thing with board members and investors. They know that when they're receiving audited financial statements, they've gone through scrutiny and they can rely on the numbers as they're presented. I'd say some other situations that come into play are whether if you're a public company, you're required to go through an audit, or if you're planning to be a public company, as well as maybe just an internal decision to make sure that you have that assurance and you have faith and confidence that your numbers are indeed true and correct. Nick Dolik:                                  Yep, yep. Obviously, no company's cookie-cutter. Every company's different at different stages. What can companies do to make sure audit process is as efficient and clean as possible? As we know, these companies are growing quickly, so time is of the essence. Brian Minkel:                    Yeah, absolutely. I would say at the very onset of you knowing or thinking you're leaning towards going through an audit, let your accounting and finance teams know as soon as possible. It's imperative that they get a heads-up because what that entails is making sure that you have some things in order before the actual audit kicks off. Also, make sure you have the necessary resources to actually go through these audits. Do you have someone on your team that's gone through it before and they have that experience there? If not, it may be beneficial for you to seek some third-party support that could help assist you going through that type of audit. Nick Dolik:                                  You're beating me to some of my questions here, but it's just helpful. How can a third-party like Nomad support a company and prep for audits? Brian Minkel:                    Yeah, absolutely. I would say that first and foremost, we have a team of people that have been on both sides, myself personally, have gone through the experience of being that auditor and going in and actually testing companies, pressure testing the numbers, seeing if there are any adjustments needed, things like that. Knowing what to anticipate is half the battle and having those resources available to you to prepare for an audit really goes a long way because it really comes down to the fact that you're being proactive about it and not reactive.                                                   There's always surprises that come up, but the fact that you are anticipating those questions and you have people that are familiar with those types of questions and concerns that may come up, it better prepares you for when it's time to work through those particular areas. Nick Dolik:                                  Yeah. As we're talking accounting, especially for me, I'm the growth side, I get the question a lot and if you want to just give everyone watching a flavor of, to get a little more granular, what's it like for Nomad, specifically, like our typical audit, and prep engagement? Brian Minkel:                    Yeah, I would say first, it's understanding the scope of the audit, so what type of audit is it? Is it a balance sheet-only audit or is it a first year audit? If it's a first year audit, it typically involves a little bit more work than happens subsequent in the next year. For instance, they will look at both these beginning balances and the ending balances, so you might need to have some additional documentation on your January 1st or whatever your initial fiscal year period starts with having documentation there.                                                   I would say also having your documentation and support ready, so whether it's documenting your internal controls and who is responsible or the accounts payable process, how sign offs are done on different key areas, as well as the supporting schedules to support your various entries and balance sheet and P&L accounts that exist. Having all those available helps prepare yourself because those will be some of the initial requests that come into play from the audit firm, and then I would say lastly, it's just being able to collaborate throughout the process and as specific questions come up just having that familiarity there to handle them [crosstalk 00:08:44]. Nick Dolik:                                  Yeah, yeah. Great. Being on both sides of the table is helpful? Brian Minkel:                    Absolutely. Nick Dolik:                                  As you've gone through those processes on both sides of the table, what are areas you typically see companies struggling whether they're aligned or whether it's just things that pop up a lot, [crosstalk 00:09:00] that? Brian Minkel:                    I think the two big areas that come into play more frequently, or just in general, are equity and revenue. For example, common areas that come up as sticking points or maybe under more scrutiny during the audit may be related to stock comp expenses, making sure you have certain valuations available and if valuations aren't available, what can we do to give that self-support and comfort for the fair values and the stock prices that were issues at those time as well as making sure that on the revenue side with revenue [inaudible 00:09:41] standards being constantly updated and being revamped, you need to make sure that you're well-equipped to handle those revisions.                                                   There might be some significant changes that you need to incorporate because of a new pronouncement that came out. Those are two areas that are constantly involving and constantly being updated, so you have to be on the front line making sure that you're ahead of the game with any changes that need to be made. Nick Dolik:                                  Yeah. Something that we see as so important is not only what companies are currently doing, but looking forward. In terms of process improvement, what are basic structures that companies can put in place to strengthen core functions whether it's approaching audit, whether an audit is not even coming into play anytime soon? What are some core things that you think companies should think about? Brian Minkel:                    Yeah, so I've mentioned this already a couple times, but documentation is key with an audit. I would say having that base level of documentation is a great starting point. You might have a high level view of how certain things play out as far as your understanding goes, but then that could lead to developing some specific areas that need to be improved throughout those higher level viewpoints.                                                   For instance, I would say some of the core areas that you would want to document are your internal controls, just how the reporting is handled internally. All those types of things are pretty imperative to have up front, so without being too repetitive, I would say, yeah, that documentation is key. Nick Dolik:                                  Yeah, I'm guessing documentation is one of these, but to kind of wrap up here or if anyone's just joining us, what are three pieces of advice for founders preparing for a first ever audit that you would give? Brian Minkel:                    I would say, again, loop in your accounting and finance teams immediately. At the first onset of you thinking you might go through an audit, it's definitely important to have those types of discussions up front and ensuring you have the right people on your staff to support that audit, and if you don't, it would trigger finding those available resources such as Nomad, like us, having that experience. It's really important to be able to go through an audit efficiently.                                                   I would also say you would want to seek an audit firm that knows your industry. At the end of the, you're able to decide who will be your auditor in most cases. That's not always the case, but to the extent you have that ability, you want to make sure that you pick one that is knowledgeable of your industry. It will go a long way as opposed to a firm that might just be a little bit more cost-effective because they came in on a lower bid.                                                   I would say lastly, again, having your ducks in order, having that documentation and support in advance of any request. There's usually a key list of initial requests that always come out and making sure that you at least have that base available helps keep the process moving from the onset. Nick Dolik:                                  Yeah, great. Nam Le:                           I have a question. Something that came up, as well, is in terms of how we engage clients during audit preps, our teams are on-site. Can you talk about how we work with management teams to hand hold them through the process, Brian? Brian Minkel:                    Yeah, I would say face to face is obviously much more beneficial for these types of engagement, especially as you're working through different areas. For instance, we have had teams that are dedicated to the audit and have gone on-site to help work through these particular areas and just being able to work collaboratively with their company's management and talk through some areas, because maybe the documentation doesn't exist, so first, it has to start with a conversation. From there, it can lead to bulleting out certain areas that will then lead to key controls that need to be tested.                                                   I would say it would be a combination of just having those face to face discussions up front as well as maybe some things are just more available on location at the client's site. We commonly go to various clients' offices, work directly there, especially with their team. Maybe certain things are only on their network. They're not necessarily always cloud-based. All that kind of stuff, as well, are reasons why we would meet with the clients face to face. Nam Le:                           Yeah, then with documentation being so key, what are some platforms that really can help management teams track whether it's deferred revenue, or is it their cat tables and stuff like that? what do you normally guide teams towards? Brian Minkel:                    Yeah, so commonly, your supporting schedules are just an Excel-based file, so your deferred revenue schedule or your stock comp expense schedule. Commonly, you should have built up that supporting schedule folder, so whether it's Google Drive, Dropbox, those are common placeholders for those documents to sit, but up and over that, as well as leveraging platforms that also produce and hold your documentation, as well. For instance, there's platforms out there that are specific to AP and AR that will store documents for you, and those might be the request of the auditor, so having that available in an easy fashion so you're not necessarily pouring through old emails makes the process that much more efficient. Nick Dolik:                                  Yep. Nam Le:                           How closely do you guys work with the auditors themselves? Can you talk a little bit about more that? Brian Minkel:                    yeah, absolutely. I'd say throughout the audit, we're in constant contact with them between us working with management and us working with the auditors. I'd say there's usually some sort of weekly check-ins, updated request lists that the auditor would send to us, so there's always constant communication as different areas are being worked on. I would say it would be definitely beneficial to at least schedule a weekly check-in call whether it's 15 minutes or 30 minutes, so just make sure that everyone's on the same page and nothing's slipping through cracks and making sure that the auditor's requests are stuff that we are aware of and to the extent we can avoid surprises, obviously, that would be beneficial. Nam Le:                           Yeah. I got one last question for you. For your typical audit engagement, can you talk about what the timeline looks like? What is the average timeline and if you were to get someone to help you with the audit prep, how soon prior to that actual initial audit start should you reach out to ... Where it's Nomad or another party to help you get your ducks in a row, essentially? Brian Minkel:                    I would say an audit engagement definitely varies. I've been on engagements where they've only lasted a month or two, where some have lasted anywhere from six to eight months. That's obviously not ideal, but again, the situations arise and you have to work through those things as they come, but I would say making sure that you at least have maybe two to three months in advance notice of preparing that documentation, it gives you time to ... Perhaps, you might have to vote on some procedures that should be in place and it requires board level vote, so for instance, a certain process that needs to be implemented and it should be implemented, but it might not have been before. It might require some additional hands on deck to make sure that we have that proper structure in place. Aside from that, you want to make sure that you're actually following that, so I would say typically two to three months in advance is probably the minimum that you would want to leave yourself in order to plan for an audit. Nam Le:                           All right. That's all my questions. Nick Dolik:                                  Yeah, so, I want to thank you so much for your time. Obviously, everyone watching, if you have more questions, myself, Brian, and the team for Nomad would be happy to discuss whether it's audit prep or whether it's anything related to finance and operations across CFO, accounting, bookkeeping, tax, and everything else we help companies with here at Nomad, so thanks again, Brian. Brian Minkel:                    Thank you. Nick Dolik:                                  Yeah.  

Leave a Reply

Your email address will not be published. Required fields are marked *