Are you prepared for your year-end audit? There’s a lot of ground to cover, especially with the additional considerations and responsibilities brought on by the COVID-19 crisis. We coordinated with our specialists to compile this list of best practices to consider as you approach your year-end audit.
Year-end close and financial reporting
- Perform a close calendar walkthrough with stakeholders (FP&A, Tax, Legal and Treasury) to ensure dependency alignment and coordination.
- Prepare a financial statement and footnote shell for management and auditor comments in advance of the year-end close process.
- Highlight key changes and provide a disclosure checklist for these areas to support the completeness of the disclosures.
- Prepare a reconciliation for every account, even accounts with no activity.
- Prepare activity roll-forwards for accounts receivable and bad debt reserve, fixed assets, intangible assets, goodwill balances, etc.
- Reconcile annual employee payroll costs to third-party summary payroll reports (if applicable).
- Assess your reserves from a fresh perspective to ensure compliance with your historical approach as well as appropriateness based on current circumstances.
- Document the accounting for unique, non-recurring and significant accounting transactions in the form of white papers.
- Provide this documentation well ahead of the audit to proactively engage your auditor.
- Review those unique, non-recurring and significant transactions to determine their impact on your cash flow as well as your financial statement disclosure obligations.
- Schedule your quarterly call with legal to assess any transactions/issues that accounting should be aware of before the audit.
- Perform an internal review of cut-off for a reasonable period before and after the Balance Sheet date.
- Perform and document a review of post-close disbursements to support cutoff and be ready for auditor inquiries.
Audit preparation and organization
- Ensure that any reliance on third party-reports (valuations, etc.) are properly understood, inputs are verified and calculations re-performed where appropriate for your controls.
- Get ahead of current hot topics (ASC 606, stock-based compensation, etc.) by preparing your company’s stance on new accounting standards that are impacting your industry.
- Proactively manage the auditors and take ownership for both timelines and objectives.
- Request weekly status reports and convene regular meetings to check progress.
- Compile your financial statement tie-out in an e-binder with copies of all information to support your financial statements and disclosures.
- Adhere to best practices for evidence completion by using electronic tie-outs.
Controls impacting financial reporting
- Ensure sign off on control design and interim effectiveness testing in advance of year end to prevent additional work during the critical post-close period.
- Review designated annual controls and perform process walk-throughs with their owners in advance of year-end testing to identify changes or concerns.
- Remember: You only have one opportunity to perform annual controls.
- Review internal control findings stemming from interim testing with control owners to ensure that the root cause of testing exceptions is not repeated during year-end testing.
- Assessing control deficiencies at year end is a significant time and energy drain.
- Review Service Organization Control (SOC) reports as they become available in order to identify any deficiencies that need to be addressed.
- Ensure the performance of internal controls testing aligns with the external auditors’ expectations to drive efficiency with control owners and to leverage testing evidence between those parties relying on the data.
- Coordinate control efforts with tax stakeholders. The calculation of the annual provision is highly complex and requires key judgments and assumptions that impact both the close and control documentation process at year end.
- Refresh key parts of your filing document (e.g. 10K/20F).
- Numerous disclosures have been adopted over the last two years (e.g. ASC 606, ASC 842, CECL) that will change what your organization needs to report and disclose to the SEC. A simple roll-forward of last year’s disclosures will not meet SEC requirements.
- Address the SEC’s 2020 rule changes regarding management discussion and analysis (MD&A) disclosures. Among the most important updates to keep in mind include:
- The SEC eliminated Regulation S-K requiring registrants to provide disclosures covering the last 5 years of selected financial data.
- The SEC also removed quarterly data requirements except for cases where there has been a material retrospective accounting change.
- The SEC modified its Liquidity and Capital Resources disclosure guidelines, including amended material cash requirements.
- The SEC updated Results of Operations requirements so they can now cover either the most recent quarter or the prior year’s corresponding quarter.
- Account for the SEC’s modernized S-K disclosures regarding business, legal and risk factor requirements. The most impactful updates include:
- The SEC added human capital disclosure requirements to its “Narrative Description of Business” guidelines.
- The SEC updated disclosure requirements to include a summary of risk factors if that documentation exceeds 15 pages.
- Align disclosures and reporting with the SEC’s new pro forma rules, including revised financial information requirements, updated significance tests and, in somes cases, reduced reporting requirements.
- Prepare disclosures related to COVID-19.
- Update disclosures with clear assessments of your company’s current standing and any changes to the business that have stemmed from the pandemic.
We hope you find this checklist helpful as you work through your year-end close and financial reporting process. If you run into any issues, keep in mind that CFGI’s team of accounting advisory professionals has specialized expertise in each one of the areas covered here. Talk to CFGI to get answers to any question related to year-end close.