What to Do When Your Company Is Audited

If you’re like most professionals charged with the enormous responsibility of safeguarding your organization’s financial security, you already fully understand the importance of your role.

Every day you strive to protect, control and maintain your organization’s financial health while doing everything you can think of to increase your levels of security and accountability.

You understand that a solid internal control system is essential for sound financial management. You also realize that if there are holes in your internal control structure, you and your organization could face damaging consequences—from a breach in security to severe regulatory violations. So you’ve taken every step you can prevent this from happening.

BUT… no matter how well you prepare and protect yourself, an audit is still a stressful and nerve-wracking experience. Here are the steps you should take when the government comes knocking at your door. 

Be prepared
When you receive notice that a state is planning to audit, do the following:

• Assemble all documents and reports the notice indicates they will be reviewing
• Conduct a self-audit
• Devise a plan to handle unpaid taxes discovered in the self-audit (Talk to appropriate executives, your CPA firm, legal counsel, etc.)
• Establish your technical competence (Familiarize yourself with the laws of the states with which you interact.)

Establish the ground rules
Tell auditors:

• You will have staff pull the documents they wish to examine
• You will have staff make requested copies (Suggestion: Make two copies—one for the auditor, one for you)
• You expect to receive a copy of all audit work papers at the completion of the audit (You are entitled to these, despite what an auditor might say to the contrary.)
• You will schedule all meetings they request

Prepare for meetings
When the auditor wants to have a meeting:

• Tell him or her, “We schedule company meetings upon receipt of the meeting agenda. Please put the agenda in the form of a list of questions you wish to ask.”
• Commit to scheduling a meeting within 24 hours of receiving the agenda
• Talk with the person who will be in the meeting with the auditor and write down the answers to his or her questions
• Consult advisers, when necessary, to ensure that hidden agendas are covered

Control the meeting
Keep the meeting short with these techniques:

• Use a stand-up approach
• Coach the interviewee not to volunteer any information
• Provide the auditor with the written answers

Handle negotiations

1. When an auditor requests copies, use the opportunity to get an update of the proposed assessments since the last time you two talked

2. If there are issues, research them and provide the auditor with your positions of exemption, etc.

• Once you have defended a nontaxable position, the auditor must show you appropriate evidence to defend his or her position that the transaction is taxable
• If the auditor cannot prove a transaction taxable, your position of exemption stands
• Negotiate daily; don’t wait until the final report is drafted—negotiations cost a whole lot more when an attorney is involved

3. Maintain professional courtesy (Expect competence, sincerity, and integrity, and give the same in return.)

4. Provide the auditor with a work space close to you and keep an eye on his or her activities (Make the space reasonable, but not overly comfortable.)

5. Spend enough time with the auditor to understand his or her personality and agenda

6. Focus on what he or she finds important

7. Answer questions succinctly—as if you were on a witness stand

8. Never offer information that is not requested

9. Listen carefully and answer slowly after considering the auditor’s agenda

10. If you don’t feel comfortable answering a question, answer a different question

• Call a break and step away from the situation
• Discuss the situation with advisers

Judicial review

• Confirm all of the facts and state them clearly and concisely
• Understand and be able to argue the state’s position
• Characterize each issue separately
• Be creative in developing and presenting arguments
• Rely on statutes, rules, regulations, annotations, prior decisions, and case law
• Summarize your position and state the conclusion that should be reached