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Advice on separate tax and audit firms and pre-audit assistance

We are an early-stage technology firm that has been in business for 3 years. We expect to start earning revenues next year.  We have about $2.5mn in annual expenses. We are looking to switch tax accountants from our current provider (too large - costs are too high and not enough service). At the same time, I anticipate that we will have our first audit next year. Two questions:

1. Does anyone have experience using separate firms for tax and audit - I ask because we have a tax firm that I really like (great references from a previous firm I worked at) but doesn't provide audit. Are there big advantages aside from cost-savings (such as efficiency and communication) to using a single firm for both tax and audit?

2. This will be our first audit and I have not had experience doing this. I know that there are likely some deficiencies in our processes and accounting that will need to be addressed but I am not exactly sure what or how to go about addressing these issues. For example, I have not yet expensed option grants since I am not sure how to do this correctly.  Do you recommend engaging the auditor (or someone else) to help address these issues if the audit is 6-12 months away?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I'll answer part 2.

Having a group to come in and perform a faux audit (or some may consider an internal audit) will save you money in the long run.

Why? Let's say they find major errors. You can fix them, even talk with your CPA firm and it will have no effect on your CPA Audit, since the CPA Audit Team didn't find the errors.

As for specific accounting issues, i.e. option grants, you're CPA firm should be the source for advice and you should always ask for an opinion letter from said firm should it be a complex issue. Thus you can show the CPA Audit Team the issue, your CPA's reasoning and help diffuse more serious issues.

If you are still unsure as to whether your CPA firm is correct, you can always contact your CPA Audit Team for a pre-audit opine.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

I recommend you read-up on the audit process. A great resource is www.pcaobus.org. All audits are not the same. Some go very far and others simply test and produce financial statements.

With respect to #1 - I work with a firm that uses the same firm for tax and audit services, and they are very happy. I don't see any downside, just benefits for putting the tasks together. Ask the preferred Accountant who they send their customers too, when they seek audit referrals. If you do not have any issue with them sharing your information, you will still benefit from their alignment.

With respect to #2 - Once you know the type of audit you wish, You will be better able to understand how prepared you are for your audit. I agree with Wayne. Involving a third party Consultant to prepare you for an audit will save you time, money and aggravation in the long-run. A good Consultant will have the eye to quickly identify deficiencies and know the "best practices" to address them.

Good luck.

Jack Judd
Title: Retired
Company: Retired
(Retired, Retired) |

My recommendation is to have one firm do your audit and tax work. I am guessing that many of your tax issues mostly revolve around filing your yearly return. At some point in the growth of your company, you may need to look elswhere for tax assistance to maintain independence of the audit. At that point you might want to seek a different provider for your tax work. Good luck.

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

If reducing costs is the driver, as seems to be the case here, then using one firm to provide both audit and tax services is the way to go, as recommended above. However, just to provide some counterpoints, there can be potential reasons for separating the two.

SOX has established some prohibitions about conflicts of interest that may arise when one firm wishes to provide both audit and non-audit services. For example, controversial tax planning strategies, presumably on the grounds that the audit firm could be viewed as auditing its own work. In general, large firms with "superior" governance principles have been moving to separate audit and tax firms.

It may be desirable sometimes to use a separate firm in order to obtain a second opinion about an important issue (at increased cost of course both in fees and time to discuss the issue with 2 advisors).

In some circumstances, audit firms may not be able to represent audit clients in tax audits or tax litigation, including tax court cases (to be avoided of course).

Regarding question #2 about pre-audit preparation -- part of an auditor's job is to assess client management's ability to perform its financial duties. If you are not prepared to defend and document accounting and reporting positions you have taken, then it may be advisable to hire another accounting firm to help you prepare first as mentioned by some of the commentators above.

Pat Voll
Title: Vice President
Company: RoseRyan
(Vice President, RoseRyan) |

I agree with the advice given regarding #2 - bring in some outside expertise to help you get ready for your audit. I would add, the sooner the better. You have identified one area where you know you need some help, but there may be other areas that need some attention as well. (The old ‘you don’t know what you don’t know” scenario). A competent 3rd party consulting firm can help assess your audit readiness, and provide technical accounting expertise, draft accounting treatment memos and ensure your records are in good shape to make the audit quick and efficient. They can also help interface with your auditors on any issues. Bringing someone in sooner rather than later gives you a heads-up on how much work needs to be done before the audit can start. I’ve seen some situations where assistance is needed only in a specific area - relatively quick and painless, and unfortunately, I’ve seen the flip side, where a team of consultants is needed for an extended period of time, tackling multiple issues. Good luck!

Topic Expert
Bob Stenz
Title: Controller
Company: Silicon Valley start-up
(Controller, Silicon Valley start-up) |

Question #1: Besides cost considerations (either option can be lower cost), it comes down to (1) the relationships (which will give you the best service), (2) desire to manage two vendors (...using the same audit/tax firm make sharing data much easier), and (3) SOX considerations with regards to the tax provision/planning (...this only matters if/when going public and may require that for tax provision to be redone if initially done by the accounting firm representing the audited financials). I like separating the work (keeps both firms competitive), however, I've done it both ways successfully.
Question #2: Your auditors should provide you with a list of requested documents ahead of your audit. From this list, you can access your audit readiness and bring in consultants as needed. You can also have your auditors schedule their field visits with a few weeks (idle for them) between their first and last visits. In this way, deficiencies can be addressed in a way that still enables the audit. This approach may result in some management letter comments, however, such comments are not unusual for startup companies (i.e. you may get management letter comments regardless of any prep. work as some auditors like to show this value add.)

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