As the hectic audit season winds down, subcontractor accounting teams across the nation can finally take a well-deserved breath. The countless hours dedicated to closing out the year and preparing for financial audits have been grueling, and a celebration is undoubtedly in order. However, it's crucial to remain vigilant, as audit findings can cast a shadow over your hard-earned break.
To ensure you’re prepared to tackle any audit issues that may arise, this article outlines best practices for resolving audit findings and preventing their reoccurrence in the future.
What is an audit finding?
Let’s set the stage by explaining audit findings. An audit finding is a formal, written observation made by an auditor indicating either 1) an issue or discrepancy with an organization’s internal controls or 2) instances of noncompliance.
Upon completing an audit, auditors will compile their findings in an official audit report or letter, which they then send to the company. As per the 2018 edition of the Government Auditing Standards (page 121), issued by the Government Accountability Office, auditors are advised to report the “criteria, condition, cause, and effect of the findings to the extent that these elements are relevant and necessary to achieve the audit objectives.”
What's the difference between internal control and noncompliance findings?
Internal controls comprise any activities, rules, and processes your organization has to prevent financial irregularities and improve operational efficiency. These findings typically fall into two main categories: deficiencies and material weaknesses.
- Deficiencies represent minor lapses in internal control systems that could potentially lead to errors or irregularities if left unchecked. Examples of these findings include inadequate segregation of duties, lack of proper documentation, or ineffective monitoring procedures. While not severe, deficiencies should be addressed to maintain the overall effectiveness of your internal controls and processes.
- Material weaknesses are more significant deficiencies indicating that a misstatement regarding your organization’s financial records could occur. If left unresolved, material weaknesses could result in substantial financial or operational consequences.
On the other hand, noncompliance findings specifically relate to instances where an organization has violated any external laws, regulations, or contractual obligations that govern its operations or industry.
For example, a noncompliance finding could arise if an auditor discovers that a subcontractor hasn’t followed the terms and conditions outlined in their contract with the general contractor (GC). This could include improper billing practices, like overbilling for labor hours or materials, billing for work not performed, and failing to provide adequate documentation to support their pay applications. Noncompliance findings in this context can lead to financial penalties, contract termination, or even breach of contract.
How do you resolve audit findings?
It’s important to take audit findings seriously to ensure that corrective actions are taken within the designated timeline. Failure to do so may result in further contractual consequences, such as financial penalties, termination of the subcontract agreement, or potential legal actions.
While specific processes and timelines for addressing audit findings may vary from auditor to auditor, I’ve outlined some general guidelines here.
1. Review each audit finding.
The first step is to thoroughly review each audit finding detailed in the report. This will help you gain a clear understanding of the areas that require your attention throughout the resolution process. It’s also important to involve relevant team members who should be apprised of these findings and can offer valuable insights into the identified concerns.
2. Identify key deadlines for resolution.
Depending on the severity and complexity of the findings, subcontractors may be given a specific deadline, typically ranging from 60 to 180 days, to fully resolve and close out the audit findings. Extensions may be granted in exceptional circumstances if justified. Keep these deadlines top of mind when creating and implementing your eventual corrective action plan.
3. Seek clarification where necessary.
If any findings are unclear or require additional guidance, promptly communicate with the auditors to seek clarification and ensure a shared understanding of the issues and expectations. Skipping this step could negatively impact your ability to execute the remaining steps, so it’s imperative that you address any uncertainties upfront.
4. Develop and implement a corrective action plan.
For each finding, develop a detailed corrective action plan that outlines the specific steps to address the discrepancy's root cause and prevent future occurrences. As with all good plans, assign clear responsibilities, establish reasonable timelines, and allocate necessary resources for implementation. (I’ve included an example of a corrective action plan in the next section.)
Then, start working on the actions outlined in the plan. It’s important to stick to the timeline created, regularly review your process internally, and provide regular updates to whoever needs them (e.g., relevant stakeholders, auditing entity).
5. Document your actions.
Keep detailed records of all corrective actions your team has taken to resolve audit findings, including any process changes, policy updates, or training conducted. This is crucial for demonstrating to auditors that you not only have addressed the identified issues but are also working diligently to resolve them. These records also serve as evidence of the actions taken for future reference and audits.
6. Communicate with auditors.
Subcontractors are typically given a specific timeframe, often between 30 and 60 days, to provide a written response detailing their plan to address the audit findings. It should outline your planned corrective actions, implementation timelines, and any justifications or explanations for the identified issues. This helps establish a positive relationship with the auditor, showing them that you’re committed to resolving these issues.
Again, the timeframe for submitting a formal response can vary depending on the auditing entity, so seek clarification on the precise deadline.
7. Test, review, and improve your process.
After implementing your corrective actions, perform internal testing and monitoring to verify the efficacy of the changes and ensure that you’ve properly addressed issues. Use this as an opportunity to improve your systems and processes to prevent similar findings in future audits. Keep in mind that auditors may conduct follow-up reviews or request progress updates to ensure the findings have been adequately addressed, so make sure you’re recording all testing and improvement activities you take along the way.
8. Leverage audit insights for team upskilling.
Once the dust has settled, incorporate what you’ve learned throughout this process into training programs and knowledge-sharing sessions within the organization. This will help prevent similar issues from recurring in the future and foster a culture of accountability and continuous learning.
What’s an example of a corrective action plan?
Glad you asked! Here’s a high-level overview of an example corrective action plan based on hypothetical audit findings subcontracting billing teams may encounter.
Audit Finding: Lack of proper documentation for payment applications, resulting in potential overbilling issues.
Corrective Action Plan
1. Documentation
- Review and update internal policies and procedures related to invoice documentation requirements
- Implement a standardized invoice package checklist detailing all required supporting documents (e.g., timesheets, material receipts, etc.)
- Conduct training sessions for relevant personnel on proper invoice preparation and documentation
2. Progress Billing Software Upgrade
- Evaluate and implement a progress billing solution with built-in controls and validation checks
- Configure the software to enforce mandatory document uploads and approvals before invoice submission
- Provide comprehensive training to staff on the new invoicing system
3. Quality Assurance Review
- Establish a dedicated quality assurance team or assign specific personnel to review invoices and documentation thoroughly before submission
- Implement a multi-level review process, including peer review and supervisor approval
- Develop a clear escalation protocol for addressing any discrepancies or issues identified during the review process
4. Monitoring and Reporting
- Implement regular audits or spot-checks on a sample of invoices to verify compliance with documentation requirements
- Establish key performance indicators (KPIs) to track the effectiveness of the corrective actions (e.g., percentage of invoices with complete documentation)
- Provide periodic reports to management and relevant stakeholders on the progress and effectiveness of the corrective actions
5. Continuous Improvement
- Conduct periodic reviews of the corrective action plan and adjust as needed based on feedback and performance data
- Encourage a culture of continuous improvement by soliciting feedback from staff and implementing best practices
How can you prevent audit findings in the future?
Audit findings should not be perceived as failures but as opportunities for growth and improvement. By adhering to the best practices outlined in this guide, you can effectively resolve internal issues and catalyze positive transformations within your organization.
Proactive measures, however, are always preferable to reactive responses. Implementing financial management software like Siteline can be a powerful tool to get ahead of potential audit findings—and even avoid them altogether. Siteline centralizes all of your billing data, offering unparalleled visibility into your cash flow. With real-time reporting capabilities and intuitive dashboards, Siteline offers unparalleled transparency, enabling you to identify and address potential issues before they escalate into audit findings.
The best way to experience Siteline’s value is to see it for yourself! Schedule your demo today, and we’d be happy to show you how Siteline can help position your team as a model of financial accountability and operational excellence.
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