Your company just passed a full-scale government audit by independent, external auditors. Those auditors just spent two weeks going over what seems like every transaction, policy and every entry you ever made in QuickBooks. Good news! You passed with flying colors. Your timesheets were flawless. Your invoices were perfection. And as you go to pop your unallowable bottle of champagne in celebration … you get the call that more auditors are on the way, this time from the government. No problem! You have the clean audit report in hand; no worries, right? Maybe; maybe not.


Unfortunately, more and more grant recipients and contractors are finding that a clean audit opinion from independent auditors doesn’t equate to passing an audit from government auditors. There are many reasons, which unfortunately include that not all auditors are equally qualified, experienced or trained by the government or by the audit firms. Furthermore, not all auditors spend sufficient time in the organization being audited to gain an understanding of the recipients, the programs being audited and the rules and terms that apply.


Small Business Under Audit


Small businesses are continually challenged to do more with less. They must weigh the cost of every control and system with the benefit being gained. While a small business may wish it could track every expense item or every project in minute detail, the reality is that it can only track the costs to a level at which there is a benefit.


A small business is unlikely to have the resources to do a task multiple times, so it will find the most efficient way to do a task that gets the result it needs without wasting resources by duplicating effort or going into too much detail (just the level needed for sound business decisions). For instance, timesheets are required, and few small businesses have the financial resources to invest in an electronic timekeeping system or an accounting system that is certified as DCAA (Defense Contract Audit Agency) compliant.


However, a small business can, through written policies and procedures, management controls and oversight, manual recordkeeping, QuickBooks (or other accounting programs) and spreadsheets develop a compliant business management system that gets the result that is dictated by the government. Keep in mind that the government dictates the “result” that the a grant or contract recipient must get, but cannot dictate the actual accounting or timekeeping program, or how these programs are used. As long as the appropriate accounting and management controls are achieved AND the financial reporting, billings, and other impacts are not materially impacted (e.g., misstated or misrepresented) or resulting in the government projects being charged inappropriately, it is only the result that matters.


Strategic and Beneficial Choices


A small business must be able to demonstrate adequate internal controls and management oversight over its projects and funds. What is done for a government customer has to be done for a commercial or internal customer (so long as the nature of the work is the same). However, what is done on a research project is not necessarily the same as work performed to produce existing commercial products. There are substantial differences between fulfilling a purchase order for a standard product off the shelf versus undertaking a multi-year, multi-million dollar research project.


Where there are differences in information needs, it is important for the business and the auditors to understand those differences. The small business must be able to communicate with an auditor how it achieved the required results and utilized a cost hierarchy (i.e., a structure of what level detail of transactions and activities were tracked) within the organization to properly track, monitor and assign costs by project and activity.


When it comes to the bottom line for a business, it is critical that the strategic decisions are made with compliance and cost/benefit in mind. When the auditor arrives, be sure that you are ready to document and explain your methods and controls. Be clear, be concise and be able to support your decisions. Also, the more you know about your business processes, procedures, and implementation, the less likely you are to get caught between differing auditor interpretations. Understand your accounting, have written documentation of your policies and procedures and make sure you have qualified advisors for compliance, accounting and audit.


Above all, if you are paying for independent auditors to satisfy audit requirements be sure that they are qualified to do government audits by education, training and experience. All auditors are not equal. So be sure that your auditors are the best you can afford.


Author: Lea A. Strickland, MBA CMA CFM CBM GMC

Copyright ©2010 F.O.C.U.S. Resource, Inc.

All Rights Reserved


Verified by ExactMetrics