The Pulse on Audit Preparedness
Audit season presents an array of complex issues, including audit team constraints, pervasive M&A activity, the nuances of materiality assessments, and more. Several of Riveron’s finance and accounting experts provide their take on some of the most pressing challenges to tackle during this audit cycle:
Addressing knowledge gaps and staying timely amid team turnover
“In the current tight labor market, lean accounting teams are finding it more challenging than ever to close out the year and finalize annual financial statements. Audit firms are facing this busy season with staffing constraints as well. Thus, it will be imperative for CFOs and controllers to be well-prepared and efficient heading into their annual audits. Now is the time to assess current team bandwidth and capabilities, as well as significant events, transactions, and impairments that may have occurred in the past year, to navigate a successful and efficient audit.”
“This season is about finding ways to make the audit process more efficient, given that staffing shortages are impacting the audit timeline and deadlines. To achieve audit efficiencies, companies can collaborate with their auditors to identify lower-risk areas and explore more streamlined ways to audit certain balances, transactions, and disclosures.”
“This year, the audit cycle centers around employee changes, impacting companies’ internal teams and their auditors. Related issues will include an increased learning curve for turnover and bringing in new hires, promotees, or arranging transfers. It can also involve learning how to navigate the new working patterns and presents complexities for teams that oversee the technical accounting for compensation. Plus, the shifting dynamics among finance and accounting teams have slowed or impacted the quality of company-prepared deliverables for all facets of financial close and audit.
Early and continuous communication from each company to their audit team becomes critical. Companies can ensure alignment where it matters most by working with the audit team to obtain ‘pre-clearance’ on management conclusions. In addition to getting conceptual agreement from auditors ahead of time, well-planned workflows can continue to flesh out the underlying supporting documentation.”
“The pandemic continues, and associated labor shortages result in significant challenges to meet deadlines and reporting requirements. Ensuring key issues are addressed and documented in a timely manner, as well as working closely with auditors is imperative to a successful year-end close.”
Minding materiality and adopting the latest lease accounting standard
“Going into this year’s audit cycle, companies need to consider their materiality assessments, especially as it relates to prior-year passed adjustments or errors discovered that go back into prior years. The SEC has had some pretty tough talk in the past year regarding objective assessments of the materiality of errors. First and foremost, this means companies should provide a quantitative analysis of prior-period errors, and they should be aware that anything that impacts prior years will get a hard look from audit teams and their risk management offices.
“In addition, as adoption of the lease accounting standard, ASC 842, becomes effective for calendar-year companies in 2022, private companies should not forget about their SAB 74 disclosures in their 2021 financial statements. While the endeavor might be less rigorous than public companies, auditors will likely still expect some directional quantification of the impact of adoption. In simple terms, this means companies need to gather some kind of expected quantitative impact related to lease liabilities and right-of-use assets, and to be able to provide that information to audit teams. ”
Dealing with a deluge of business deals
“Businesses saw plenty of mergers and acquisition activity in 2021. With the continued deal activity comes continued focus on the proper accounting for the transaction and integration into your existing financial reporting structure. Complex deal structures have led to more complicated equity structures which will be scrutinized by auditors, along with their regular testing of the acquisition accounting.”
Wrangling what’s new with debt and equity instruments
“Companies continue to get more strategic when structuring the terms of newly issued debt and equity instruments, resulting in very nuanced contracts and unique share structures. Given this increase in complexity, you can bet auditors will be focusing on any new grants from the past year.
A comprehensive evaluation of all the key features in these instruments and the related accounting conclusions – whether there are any embedded derivatives and determining proper classification of the instruments – will be paramount to a successful audit.”