Doug Houser:
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There's nothing scarier than a tax audit gone wrong to haunt your dreams. Knowing the keys to success or failure may save you time, money, and an audit nightmare. Today, Michaela McGinn, Principal and Director of Assurance Services at Rea & Associates is here to share a few best practices so you can prevent your own audit horror story. Welcome to unsuitable, Michaela.
Michaela McGinn:
Thanks, Doug. Glad to be here.
Doug:
Well, it's great to have you. We're recording this a couple of weeks early, but it's Halloween week, so we thought we'd go with the horror theme this week. Obviously, in jest but we will share a few audit horror stories from days gone by, which I know you and I both have.
Michaela:
Have a couple.
Doug:
Fortunately and unfortunately. You've obviously had a long career in public accounting, and have seen more than your fair share of good practices, bad practices, and everything in between. Talk a little bit, if you can, about that journey from when say you first started and some of the things you've learned over the years.
Michaela:
I think that on the positive side, I know we'll get to some fun horror stories maybe here along the way. The fact pattern doesn't change. There's a couple of things that I focus on, and I think over the years I've just learned to appreciate and understand more. These aren't anything weird or new or big wows, but project management, collaboration, communication both with your internal team, your external team, actually probably figuring out who is your team has a huge impact on whether an engagement goes well, whether it doesn't go well. Bringing in the right people would be something else to know what you don't know. The other big thing is when you mess up, say it quickly, and just figure out how to fix it.
Doug:
Right. When we talked about this, I remember, for those that aren't aware, Michaela and I used to work together 30 years ago at Deloitte where we both started our careers. I remember me being a youngster and coming out of school, they throw me out on some reviews and some audits. Of course, I had no idea what the hell I was doing, right? You try to get some guidance from the other team members and they tell you to go ask a few questions, but you learn over time. Right? I mean, that's part of it is, you're not expected to know anything right away but you figure out the right way to ask questions, how to talk to people, how to just get a read on them, get a feel for their business, that kind of thing. Right?
Michaela:
Absolutely. I mean, from the technician side, I'll tell you my first story. There's a guy, I don't know, he's probably not listening to this. His name is Steve Silva. Steve was a senior at Deloitte. The very first week that we were there, remember, we're going back 30 years. Everything is manual. We have blue checkmarks and we have red checkmarks. Checkmarks are just little picture things telling you what you did and what you didn't do. He is doing this training and he has a list of probably 10 or 12 of these things. Squiggly lines, a check with a line, all this stuff. I remember getting there and going, oh my heavens, how am I ever going to remember this? With little tick marks, little reds and blues and things. The fear is that first person. One of the things you learn over time is, what do I really need to remember? What can I go find? I think that that's part of the learning process. The other thing is really, there are very few things that you can do that are career-limiting or can't be fixed. Depending on what level, the person you are.
From the client-side, we're the guys coming in after looking backward. Depending on who you're talking to if you're talking to the owner versus if you're talking to an accounting clerk or an AP or person, you really got to understand and that's part of the communication. The team part is our clients, in some of their minds, they think we're there to find out what they did wrong. Our own perspective is like, well, okay, we find this and we move on and we deal with it. But in theirs, this is their livelihood. This is what they do every single day. If we don't have a perception and a perspective of what they're doing and how we approach them, it's not going to go well. The other thing is I tell our people, hey look, our clients have full-time jobs while we're not around. While we're so narrow-minded on I got to get it done and I got to get it out of the door because that's what we think they want, which our clients do.
I mean, they want it done in a timely manner and all that. They're also trying to manage the rest of their day. They're trying to get bills out. They're trying to get people paid. They're trying to get the product in and out the door. We as a team have to remember what we're doing and what they're trying to do, and that's where that collaboration comes in. Because if we get that wrong, it doesn't end well or it doesn't go nearly smoothly as it could.
Doug:
That's certainly a great perspective. I mean, ultimately, it took me certainly more than a while to learn this. The clients want, they want some feedback. What do you think? We forget that a lot of the value we have is that we see hundreds and hundreds in over our careers, thousands and thousands of businesses. They oftentimes only see the one that they're in, particularly if it's generational or they've been there and run it a long time, so they want that feedback. What do we do that's different? What do we do that's good? What can we work on? Those subtle little things while they're not technically part of necessarily the procedures that we're tasked to go through, that's a lot of value for them. It pays to be observant. Right?
Michaela:
Absolutely. We're in the middle of a project right now that we're reinventing or reenergizing engineering. What we are talking about though is you've got a process and you got client service. One deliverable that everybody expects is some kind of obviously report. The rest of it is why are they coming to Rea? [inaudible 00:08:07] that they only see one thing. We take for granted sometimes that we see so much. I think we don't give ourselves enough perspective on what we can share, what we can bring. If you're in manufacturing or construction, or honestly, even just for-profit. It's the size of the organization. What are the things that I really enjoyed when I was at Deloitte? I worked on very large clients and very small. The ability to show your client, hey, you don't have to, it doesn't mean hiring somebody new to get better controls in place. Also, they're looking at operationally. Hey, what are you seeing these guys over here do?
I've always struggled with this. Well, the process is important. If you really want to make a difference, it's learning your client's business and understanding their concerns. It goes back to, I know you think you're there, and I'm talking to the auditors and insurance folks out there may be listening. I know you think that our job here is to just issue this report. Well, that's just one little piece of it. I know if you talk to your clients, tell me how you can help me. What you're seeing? Honestly, from my side of it, that's a lot more interesting than looking at a cash rec or checking this balance or that balance. It's more interesting to understand your client. You'd provide so much more feedback collectively.
You're just better client service because you have a better way of saying, hey, what else do we need? Who else can I bring from a surface standpoint that is going to make a difference for them? If you put your mindset and this is about who we're [inaudible 00:10:07]. This really has nothing to do with us. It's all about you serving and why. It's a totally different perspective to tackle things from.
Doug:
Yeah, for sure. You got to think about why they need this particular service as well. Who is the third party that requires it? Is it a bank because of financing requirements? Is it a surety provider due to bonding? What is it? An outside board. Think about the perspective that they want. It's that same thing that doesn't take for granted all that we see and bring our expertise to the table and communicate that to the clients. We had a nice story recently, a new client manufacturer, somebody that I'd known for a long time that was able to develop a relationship with our firm here. Of course, I don't know a whole lot about manufacturing. It's not my world. I brought in Andrew Geiser from our Millersburg office. He's got great experience, worked at a manufacturer for a long time, ran a facility, so he knows the operations.
I tell you, we brought him in and just spent a couple of hours letting him tour through the facility, ask management questions, and information that he was able to come up with just from that couple of hours was just phenomenal. It's just a little add on to a part of our assurance process, but I can tell you that's really the value for sure.
Michaela:
Sometimes you don't have to be knowledgeable about the particular industry, that's always great because you bring a certain perspective of it. Sometimes being able to bring what you see in one industry, obviously, your background is more construction but bringing that perspective to light into a new client can add something. Sometimes we get so narrow, we focus on I want folks in my industry... When I'm talking to some of my clients and they're looking for a new controller or a new CFO, and you say, well, what kind of person do you want? One of my CFO said, I don't care what their industry is, I need somebody who can learn and can show that they're adaptable in different environments. I'm like, that's the perfect answer. You can teach somebody different accounting software.
You can teach somebody an industry, but you cannot teach people how to learn and to be adaptable at that level. I mean, you can at the younger levels. I mean, that's part of what we do and train and all that, but the ability and mindset to learn are huge. If you're open to that as a company when you're looking for resources, you might find somebody who's going to bring fresh ideas and a fresh perspective.
Doug:
That's a great point. That goes back to one of your original points about team building, right. About having the right people involved and the communication with those people.
Michaela:
When you talk about the team, when we talk about the team, in my mind, a team is made up of both Rea folks and it might be some assurance folks. We're going to have some tax folks. But the other part of the team is on the client-side. If we don't look at the team as that whole group of people, then we already started off on the wrong foot. You got to look at everybody and bring everybody into that conversation.
Doug:
Yeah, for sure. I think it's a good upfront to outline everybody's expected role. I know some of the ones where I've had difficulty, I look back and say, well, I know I didn't communicate either to our team or the client exactly the role that everybody is and should play. Sometimes people are overcommitted. We expected more out of a certain maybe individual or client, thought they were going to be able to provide us more answers, more capable of information. That's not the case. The same goes for our side. Sometimes the client has different expectations and we don't outline those as well as we can upfront. That goes back to the communication gap. I know one of the things you've talked about before is the communication gap in auditing and trying to identify those strengths and weaknesses.
Michaela:
I put communication, transparency, project management altogether. One of the things that get us in trouble is the lack of transparency. We think our client understands everything we're asking for or doesn't care or whatever. From the project management side, it's always working backward. When do we need to have this by? You're going forwards and backward through the whole process. When does it need to be back by and you back it up. Then moving forward it's like three or four steps ahead. Okay, I need this here in order to do this next step. Remember back to it's a team, so I can't do this without my client providing me information. If I'm not sharing why I need the information or I'm not helping to prioritize, one thing you always hear is we have what we call the PBC list, that's the Prepared By Client. It's really just the information that we need from our clients to do something.
Well, we give them a laundry list of 20, 30 things. If we want to be really successful, we're going to sit down with the client and we're together going to decide when we're going to ... We're going to help them prioritize because sometimes we're throwing a lot of different things at them and if they don't have a big team, if you leave it to our clients to choose, well, they're going to choose. They go, okay, well, I can do this here and here. If you haven't said, I need item seven first. That's what leads to horror stories. That's what leads to things, the rushing at the end, mistakes get made. Because we've made a lot of assumptions, we're not communicating and we're not helping create priorities. We're not being transparent, not intentionally. We just don't think about it. That's half the problem is when you stop thinking of something becomes so ingrained in what you do and you don't stop everyone as well. Well then, that again, that's where we're headed down a bad path normally.
Doug:
You talk about transparency and communication. I'm going to use that to segue here to some of our horror stories because that reminds me of one of mine actually from my banking days. We went out and it was a big, big financing package. We did what we termed field exams, which are not unlike agreed-upon procedures in essence on specific things, in this case, inventory receivables. It was interesting getting that information back and the field examiners came back and they're telling us stuff. Gosh, it was really weird like the salespeople wasn't allowed to talk to the finance people and the finance people weren't allowed to talk to the operations people. Nobody was allowed to talk to management unless they were all together. It was all this weird stuff.
We didn't pay enough attention to it, that part of it, because everything "checked out." Although it turned out it didn't and there was a 20 million dollar fraud. Go figure. That was an ugly one, but it taught me the lesson of sometimes look for the less than obvious clues when you think about say communication and transparency. That's a big one for me, lesson learned. How about you? What are some that you've seen over-
Michaela:
Some of the lessons like the horror stories, part of it is that rush at the end. We didn't do what we needed to do upfront. You're doing your best to get this out to your client. If you haven't talked to them, it's not just about getting that report out. It's that you can miss something else. You miss something else really important to them that is just crucial to it. For me, the rush to the ends is the worst. Some of it is part of them, it's just the nature of the beast. One of my biggest horror stories is we had... This was a large client. It was a consolidation. We were doing part of the work and somebody else was doing other parts of the work. Somewhere along the line, we're supposed to issue this report. My senior manager walks in in the morning and says, I think we might have a problem. I don't think we audited this segment. I'm like, okay, well, call somebody in Chicago and say, I'm not sure you can issue this 10-K. That's really not the …
Doug:
Oops.
Michaela:
I'm like, okay, I don't want to have to make that phone call. Let's work really quickly and see what it is we had done and not done. It ultimately all worked out. If we hadn't been in the rush, if we had been slowed down or we had done this stuff on the front end, we never would have been in a situation, to begin with.
Doug:
Yeah. I think that goes to what you talked about in terms of project management. For me, with a lot of obviously construction clients, I always try to tell them, look, our business is just like yours. We're in the project management business. Let's work backward from the deadline, as you mentioned. We try to build from that, okay, here's when we want to be here, these milestones. It's really helped to try to communicate that. I think that's a great best practice that you brought up.
Michaela:
Well, and budgets. When you think about construction and you think about what we do, budgets are another key part. They're guides. They're never meant to be absolute, but that monitoring of the budget, and there's a two-prong. I mean, one, if you had the project management side of it, you know, okay, I need to be here by X date and I need to be done by Y date. You're monitoring the budget to say, okay, one, time-wise, am I working where I need to be? Am I where I need to be by the date I need to be there? Number two, what's it costing me? Getting everybody's buy-in on that budget is also crucial. I had a story recently where I had a couple of folks saying, we had some bad jobs. It didn't go as well as we expected. We're like, okay, let's learn from it, move on. I said, well, let's go back and look at the budget. I said, what happened here? The comment I got back was, I haven't looked at the budget since we've put it together. Like, what?
No, I never look at the budget. What you're doing? It was a great learning experience. It was a great learning opportunity. I'm sure some of our folks who are listening to this, they're going, well, I know who that's about. Again, it's a tool. I mean, it's not the end of the world. I mean, this is all for us. It's about learning. When we have clients in the construction business and they do something, what are they going to do? They want to change orders, and they want to sign a change order. They want the buy-in from their client to say yes, you want me to put in sliding glass doors rather than a single pane? Okay, great. I can do that. Here's what it's going to cost. Or, add a third floor. Do whatever. Because I know ours to do a little bit more than that, putting sliding glass doors. If we do that on the front end, we communicate with our client. We make sure they know, hey, here's what's happening. It's no different than ours. If we're not managing that and we're not saying, hey, I should be here by this point in time and I'm not.
Here's the other thing about client service from the horror story standpoint. We sometimes think client service means to exclude the client. We mean that from the standpoint we don't want to bother them. We're going to take care of this ourselves. Well, the challenge in that is that they may be able to give us a simple answer as to what's going on or we need to give them the opportunity to fix it. Now they may come back to us and say, I don't know, I need you to work on it. That's where we're like, okay, we can do that or we work on it together. But when we just go in and do it, and then they're like, why don't I have my report? I've had that happen plenty of times because of X, Y, and Z. They're like, why didn't you tell me? I want to go do an additional bill. They're like, well, you didn't tell us it's going to cost more. It goes back to that whole thing about assuming. It's like, well, I assumed you figured that out since I've been telling you all these extra things.
Well, don't assume. You need to talk to your client. Collaboration, one team, project management. It all goes together. When you do those things, communicate and you're talking to them, they're learning what they can do differently, maybe not today, but in the future. We're learning how to communicate and say, okay, and troubleshoot. I mean, the same thing in construction, the same thing in... Troubleshooting is a crucial part of what we do. You talk about horror stories. Horror stories are when you get so far down in the detail that you forgot to put your head up and go wait. Okay, I'd love for it to be this way. What's the outcome? When you find out the outcomes, it's not a big deal. Okay. Move on. It's crucial to get to the end. How big a deal... Yeah, we like it to be really in a certain way. Sometimes it just isn't, and that's okay. Lift your head up and go, okay, is it a big deal or isn't it? Figure it out from there.
Doug:
Well, those are certainly great lessons and great insight and a great perspective. Certainly, if you're trying to think about preparing as we get towards the end of the year here for your own review or audit from a client perspective, don't hesitate to reach out to Michaela or me. We can talk you through some of these things. I like to tell people I'm not necessarily that smart but I've seen a lot of stuff. That's valuable. Anyway, thanks for being the guest this week, Michaela. Loved it. We look forward to having you back on again sometime soon.
Michaela:
Thanks, Doug.
Doug:
If you want more business tips and insight or to hear previous episodes of unsuitable, visit our podcast page rather at www.reacpa.com/podcast. While you're there, sign up for exclusive content and show notes. Thanks for listening to this week's show. Be sure to subscribe to unsuitable on Apple Podcast or wherever you're listening to us right now, including YouTube. I'm Doug Houser. Join us next week for another unsuitable interview from an industry professional.
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