How to Set Your Business Up for a Smooth Audit
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1 minute
February 21, 2024
From organizing your financial records to tracking each business expense, an easy, automated banking platform is a valuable tool for any type of audit.
Hearing the word “audit” can stir feelings of anxiety at any company. However, being audited—internally or externally—doesn’t have to be an intimidating or disruptive process. In fact, with the right approach, many businesses can actually benefit from going through their finances with a fine-toothed comb.
Below, we dissect why an audit may be warranted, outline four key ways you can prepare your finances effectively, and explore how leveraging a spend and cash management solution like Rho can make getting through an audit as painless as possible.
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Whether for corporate financial oversight or to accommodate continued growth, there are several positive reasons why your business may conduct an internal audit:
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.
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:
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.
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.
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.
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.
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.
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.
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.
Want to learn more about how Rho combines commercial banking, AP, corporate cards, and more on one productive platform?
Schedule a demo with our expert team, and discover what modern business finances can look like.