Common reasons for business audits

Whether for corporate financial oversight or to accommodate continued growth, there are several positive reasons why your business may conduct an internal audit:

• You want to proactively improve operations.A voluntary, periodic audit can help your organization brush up internal controls, enhance efficiency, ensure compliance, and reduce the risk of fraud.
• You’re receiving funding.Companies reaching Series B funding or beyond often conduct audits to provide ongoing transparency for their investors.
• You’re undergoing a merger or acquisition.As part of due diligence, potential buyers or partners will want to audit your books to make sure there are no post-deal surprises.
• You’re planning to go public.A comprehensive audit is a critical stage in the IPO roadmap.

Of course, no discussion on audits would be complete without touching on the unplanned kind that comes from the IRS. But as you’ll see, the risk of a tax audit is relatively low—unless you give the IRS a reason to investigate.

Are you signaling any of these red flags?

Each year, roughly 1 to 2 percent of businesses get audited by the IRS, although this figure can vary based on business structure and size. If an audit reveals a mistake in your tax returns, your company could be forced to pay back taxes, interest, and even a hefty penalty—or go through the hassle of an appeals process.

There are several accounting red flags that could catch the eye of the IRS and trigger an audit, including:

• Filing tax returns late or missing extension deadlines
• Discrepancies or sudden changes in revenue
• Claiming too many businesses expense deductions
• Not following the latest tax laws
• Excessive vehicle deductions
• Calculation errors or rounded figures, often due to manual data entry
• A pattern of inconsistent reporting
• Substantial subcontractor expenses
• Information received from a tip about a company’s wrongdoings

The IRS also selects companies at random and through computer screenings using statistical formulas. So, being audited doesn’t necessarily mean you did anything wrong—it could just be bad luck. To be on the safe side, remember to save six years’ worth of financial records in case the IRS sends your company an audit notice.

How to make it through any audit unscathed

Whether prepping for an internal audit or taking steps to prevent an unplanned one, the strategy is the same—good bookkeeping. Here are four ways your fiance team can set an audit up for success.

1. Stay prepared and organized.

The cleaner you keep your books and the more organized your financial documents, the easier it will be to pull the precise information the auditor requests and get through the process fast.

It helps to manage your finances on a platform that integrates your banking with AP, payments, and other workflows, so all of your data and documentation is in one place and immediately accessible. Being organized and efficient can also help save money, especially considering sharp rises in audit fees.

2. Have financial reports readily available.

The auditor will request proof of current or historical financial records, including gross receipts, expense receipts, bank statements, deposits, and more.

Make sure your banking and finance tools sync seamlessly with your accounting software, so you can automate reconciliation and generate reports instantly and accurately. It certainly beats manually sorting through paper documents or spreadsheets to throw the right report together.

3. Track your expenses from end to end.

During an audit, you may need to substantiate expenses to prove they qualify for related business deductions. This can be difficult to do if your expenses aren’t tracked or categorized properly.

Make sure you use smart financial tools that instantly identify the whos and whats behind each invoice and expense, auto-capture every receipt, and automatically map transactions to your accounting codes—providing both high-level and granular views of company spend.

4. Keep experts in the loop.

Even the most experienced finance teams shouldn’t go through an audit alone. To cover all your bases, it’s important to involve your accountants and/or attorneys early in the process.

With the right banking platform, you can set customized rules and permissions to allow any entity, stakeholder, partner, or bookkeeper access to just the financial information they need and keep everyone safely up to speed.

Level up your finances with Rho.

When it comes to keeping a careful watch on your finances (and staying off the IRS’s radar), don’t underestimate the power of your banking platform.

As an all-in-one spend management solution, Rho keeps all of your accounts, workflows, and documentation in one place. Everyday AP flows are fully automated, and all expenses are reported and categorized in real time, so it’s easy to track your spending across corporate cards, team members, and cost centers—with robust controls in place so the right people (and only the right people) have access.

Ultimately, this means better, safer financial teamwork—leading to fewer errors overall and making an audit less problematic.

Get started.

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