Is tax time a dreaded chore? A combination of annual accounts and audit fears? Mark Muller and Peter Bembrick look at how you can maximise the time and effort spent on preparing annual accounts and becoming audit ready by turning this into a valuable activity for improving your business.
While not all businesses need to have a full annual audit, all need to prepare some sort of annual accounts, even if only for tax reasons.
Businesses are currently in one of three positions on their account preparation for the ending financial year. Many are in the throes of getting all the required material together so the accounts can be completed. Others are postponing, leaving it in the too-hard basket because they know it’s not going to be an enjoyable experience, and will put it off until the last minute.
A smaller number have already finished their year-end accounts (whether or not they have lodged their tax return) and are probably feeling very satisfied with themselves.
Few business people really enjoy the process of preparing accounts, but businesses that have put in place ways of getting it done easily and efficiently find they have useful information available. In doing so they put themselves in a position to make better business decisions. The data they have available is not only more likely to be accurate but will also be available at a time when it can be used most effectively.
Businesses that have their end of financial year accounts finished already have useful management information to plan activities and set budgets for the next year.
So accounts preparation should not be seen as just a compliance, pre-audit or tax return requirement. Businesses that stay on top of their accounting gain many benefits. Not the least of these is that if the accounts are being done correctly and completed promptly, it is one less area to worry about. Clerical employees are also likely to be more efficient and productive.
An obvious tip in doing this, but one we find is often ignored, is simply to take advantage of the work that must be done every quarter in preparing the compulsory BAS returns. The calculations that have to be done for these returns mean that a significant proportion of the work required to complete a full set of accounts for a business is already underway. It doesn’t make sense to complete the BAS and then put all the calculations to one side so that details are forgotten when final accounts for the year are prepared, or an audit undertaken.
Businesses that don’t keep records up-to-date will inevitably waste time unnecessarily looking for information or trying to work out what it was all about.
Audit Ready Accounts
Having accounts that are ready for audit indicates an organisation that is organised and has a good financial discipline. This discipline will also be reflected in the way costs are controlled and finances are managed, and this is likely to improve the profitability of a business.
For example, timely reports allow a business to manage its finances better, reducing the cost of funding by improving internal funding in areas such as inventory and debtor management.
Good financial discipline also reduces the chances of fraud. If accounts are being processed correctly, any discrepancies or inconsistencies are more likely to be spotted. Fraud prevention techniques are also easier to implement as they simply become part of the system.
Another good tip is to use your accountant’s experience to develop an approach that suits your needs. Again, it may sound obvious, but we find too often accounts clerks are left to decide upon, and implement, new accounting systems that the accountants only find out about when there is a problem. Even if there is not a problem, installing new systems without proper evaluation often leads to information being produced that no one looks at, and to a more complex process than is really needed.
External accountants work for clients in a variety of businesses and this experience can be used to help decide the best and most cost effective approach for other clients. There are a number of proprietary software programs available to help improve a business’ efficiency in producing accounts. An intimate knowledge of accounting is not required to operate these, but if businesses also use their accountants and accounting staff sensibly, such programs can give instant reports and an insight into the status of a number of business areas. They also help maintain filing with computer-based records. Even manual files will be maintained more efficiently if data is entered regularly.
Successful business owners recognise that up-to-date accounts help good decision-making, not just for internal management reasons, although this is important. Having accounts up-to-date means that you are ‘opportunity ready’ for any external approaches that may arise, such as new business ventures, acquisitions, agency opportunities or trade buy-outs. Being able to produce accounts promptly can be a major benefit, particularly if a new business partner wants to see audited accounts. Being able to do so quickly and easily shows you are on top the business and will get any new relationship off to a good start.
Our view is that accounting procedures and compliance should not be seen as a cost centre but as a valuable source of useful, if not essential, management and financial reports and a worthwhile discipline to have in place.
There are ways of saving costs and at the same time making best use of the accounting function. These include keeping processes simple so that accounts are easy to prepare, doing as much simple processing as possible in-house, and giving information to your accountants in easy to use ways so that preparing final accounts is made simpler.
This latter point really reinforces the argument about keeping the accounts up-to-date. If they are, you know that when the accountants get them they are already in a usable form rather than the proverbial bunch of vouchers in a shoebox. Maintaining accounts regularly will inevitably cost less than leaving it until the end of the year.
It will also mean they are more accurate, an important consideration when dealing with the Tax Office. Remember, the Tax Office records are likely to be very accurate and it has access to a number of external databases. If there are inconsistencies between what it knows and your returns, prepare for an audit.
Audit Check List
The type of information that needs to be maintained and kept on file includes:
* Bank statements and reconciliations—particularly important in times of direct debit and internet transfers.
* Aged general debtors—very useful in showing that customers are paying on time and that debtors are being followed up in a timely and effective way so that bad debts are avoided.
* Lists of expenditure by type that reconcile back to the bank statements. This allows you to identify potential areas of waste and should be undertaken at least monthly. Ledger accounts only need to be reconciled annually.
* Fixed asset register, including supporting documents for all major transactions undertaken.
* Tax invoices and BAS returns.
* Insurance documents.
* Payroll summaries, including employee entitlements and superannuation statements and payments.
If such records are maintained well and kept up-to-date any audit becomes a relatively simple process and, as indicated, having the information up-to-date provides business management with very useful information on the health of the business.
When it comes to a potential tax audit, there are a number of factors that will attract the ATO’s attention. We have shown a checklist for these in Table I. Again, most of these will be avoided if good accounting records are maintained and the advice of external accountants taken.
Certain industries need to be particularly focused on maintaining good accounting records and to be prepared for a potential tax audit. The ATO has indicated that they will continue to look at a range of compliance issues in certain industries as shown in Table II.
(Table I) Checklist of what will attract the ATO’s attention:
1. Inconsistencies with other returns and payments, such as BAS.
2. Undisclosed income (such as interest) reported to the ATO from other sources.
3. Financial or tax performance that varies substantially from industry patterns.
4. Significant variations in the amounts or patterns of tax payments compared with past performance, relevant economic indicators and industry trends.
5. Unexplained variation between economic performance, productivity, and tax performance.
6. Unexplained losses, low effective tax rates, and cases where a business or entity consistently pays relatively little or no tax.
7. A history of aggressive tax planning by the corporation, group, board members, key executives or advisers (such as accountants).
8. Weaknesses in the compliance structures, processes, and approaches.
9. Tax outcomes that are inconsistent with the policy intent of the tax law.
10. Multinational groups with a history of tax losses or lower than expected profitability in Australia (such businesses are likely to risk a transfer-pricing audit).
(Table II) Compliance activities (from the ATO):
The ATO will continue to focus on a range of compliance issues in the following industries during the current year:
1. Building, property, and construction.
2. Adult industry.
3. Alcohol industry.
4. Banking and finance.
5. Duty-free shops.
7. Horse racing.
8. Legal profession.
9. Licensed hotels and registered clubs.
10. Motor vehicle industry.
11. Petroleum industry.
12. Restaurant, café, and takeaway food.
13. Tobacco industry.
—Mark Muller is an audit partner and Peter Bembrick a tax partner with accountants, business and financial advisers HLB Mann Judd Sydney.