The external audit - what to do to prepare

The procedure to follow for an external audit

As we approach year-end, we are reminded of the fact that soon new laws will be in place, adding to the increasingly complex world of property management.  In addition, year-end is a time to think about your record keeping obligations and procedures.  How can you improve and or stream-line your procedures?  In business, saving money is as valuable as earning money, so figuring out how to improve your company efficiencies is as important as getting a new client. 

Small, medium and large businesses alike maintain records for the various tax and record keeping obligations they have for employment and regulatory obligations.  From payroll taxes, to Worker’s Compensation insurance, to regulations for hazardous materials, we are all keeping records to record our compliance with the ever-increasing obligations we have to monitor and pay taxes under various governmental programs and initiatives. 

Inevitably, one day you will receive notice of a company audit.  One governmental agency or another will want to review the history of your record-keeping and tax payments for one of these various obligations.  Interestingly, your response to the notice of the audit, regardless of the topic or subject area for which the audit will take place, should be the same.  The proper response is a four-step process.

In the mid-1990’s I went through one of these audits and found that our record keeping, while complete, was terribly confusing.  It was clear if we presented the information as we had it structured, the audit would either take many more weeks than necessary, or would result in the agency determining we were not in compliance, just because of the poor structure of our information. 

By preparing in advance, we had the time to reorganize our information.  The result?  The audit took less than a day and we were found to be in material compliance with the law.  We received only minor recommendations for improvement on some very technical issues and our audit response was able to be completed in the same week we received the audit results, because the requested changes were so minor. 

So what did we do?  Here’s the very simple process we follow.

Step One - Appoint Point Person

Long before you ever receive notice of any audit, you should appoint a single person in your office to be responsible for the acceptance and review of all notices of audits.  Not only will they accept notices, but they will act as the coordinator within your office for the audit response.  Select someone with a mind for details and coordination.  These skills are essential. 

Step Two - Notify Mail Room

After appointing a single person in your office to receive notices, make sure that the individuals’ who are responsible for your mail distribution are aware that all audit notices should be forwarded to this individual.  Review this annually with staff members. 

Step Three - Preemptive Self-Audit

Conduct a preemptive self-audit in preparation for the actual audit.  Fix problem areas by locating any missing documents and improve your filing system or materials presentation in the event it is confusing or weak.

Step Four - Hire outside consultant

Select an outside consultant or attorney to assist you in your preemptive audit and to represent you at the actual audit.  Don’t even respond to the audit inquiry without first speaking to a consultant or outside counsel. 

If you don’t know have an existing consultant or attorney resource and don’t know who to hire, reach out to your industry colleagues who may have already been through this experience.  Connect with your industry partners or friends and ask for referrals and recommendations for consultants and counsel. 

In addition, ask for the names of the consultants and counsel you should stay away from!  Evaluations, both positive and negative, are of equal value to you and should be sought after. 

Happy news?

Audit notices are never happy news.  If nothing more, audits are time consuming and disruptive.  In the current economy there is little or no excess staff time or energy for non-income producing special projects, such as an audit.  Luckily, you can reduce the time they take and audits can be valuable and useful if approached properly. 

Don’t panic.  Don’t assume the worst.  Prepare yourself and take the necessary time and steps to prepare in advance for the audit.  In the end, the preparation work you do before the audit will save you time and money in the future. 

**********

Merrie Turner Lightner is a property owner and manager, as well as an attorney and real estate broker in San Francisco, California.  She has been actively involved in the rental housing industry for over 25 years, having served in numerous industry leadership positions, including President of the California Apartment Association and a member of the San Francisco Rent Board as a landlord-commissioner for 12 years.  Today she is an avid property management writer, as she builds and maintains the property management site MyRentalUnits.com.  In addition, she regularly serves as an expert witness in high profile or complex rental housing cases.