In our third installment with Michael Shafman, CEO at NexCloud Consulting, we cover some of the misconceptions people have when dealing with audits. Michael covers the value he gets from having a robust accounting tech stack to deal with potential audits. Being able to leverage tools that can simplify your data search and provide transparency into your transactions can be a real lifesaver in these processes for both you and your clients.
What is your experience dealing with Audits?
I started my accounting career over a decade ago as an auditor at KPMG in one of their Toronto offices. I spent most of my first four years between KPMG and a midsize firm in Toronto as a financial statement auditor. I understand what’s required from a firm perspective. I’ve also been on the receiving end on the company side for financial statements and CRA audits before. Some personally like my wife’s company for a GST audit, as a finance leader, helping facilitate for clients and helping team members with audits as things came up.
What are the types of audits that people are at risk?
There are two different concepts at play here. The first one is financial statement audits. Financial statement audits are going to typically be a requirement, either regulatory or from a stakeholder. These are audits that are required and not triggered randomly and are performed by licenced CPA firms. On the other side, there are CRA audits, which typically can be random, triggered by a criteria or variance they are looking for, or based on a targeted revenue or expense type that CRA feels is more prone to error or subjective decisions. Accounting firms will remember when CRA has targeted rental income, professional fees, primary residence exemptions and such. They send a letter to a large pool of taxpayers that fall into their targeted category, tell them they might be selected for audit on that topic, and that they can make changes without penalty if they have reported an error. They don’t have the resources to audit everyone so they hope the letter triggers tax payors to amend, and they only audit a small sample of those they reached out to Depending on the audit, they might mostly be looking for backup for transactions. And the backup is the easy thing that Dext can help solve.
How can people avoid triggering them?
You have the random ones and the ones that are on purpose. If you are using an accounting firm, they should hopefully be able to spot things that might trigger an audit with CRA ahead of time were in their control. They will run a variance analysis, and they will take a look. So you want to keep your financial statements mapped the same way to your tax returns and keep them consistent from year to year because CRA will look for big jumps and drops to see if there are changes. It’s not necessarily anything that’s in anyone’s control. People have fluctuations in their business, and it might just automatically cause it. It is better to be prepared for it than to prevent it because there are so many unknowns. In recent years, first-year corporations have been hit disproportionately with GST audits when claiming refunds as is common when getting new businesses up and running. This was the case for my wife’s company and I was prepared for it. It took me all of 15 minutes for it to pass with flying covers, and most of that time was my letter addressing the CRA agent.
What are some of the benefits that a product like Dext can provide to help with audits?
It starts with the accessibility of information. I can go into the platform and quickly download anything that I need to provide to an auditor. Dext makes it easier to keep track of everything and how it connects to my other tools, so it’s super easy to identify and match it to the payment inside of there as well. Because everything’s all connected it’s not even difficult to go back and search for dates or specific transactions because if you’re using the system right, it’s all there.
I can quickly go ahead and shoot auditors bank statements, a report from Xero. Here are all the payment dates, and here’s everything, and here are the purchases that match. So it becomes a very quick process to facilitate making it easy for yourself and your auditor. There have been many times where it would take me longer to get a junior up to speed than to just grab all the information from Dext myself.
What is the process like without a tool like Dext?
There is a significant amount of frustration from CRA auditors when they have to cut through a messy paper trail. The fact that I can say, I can find that and get it for you. They’re like, What, really? Because a lot of the time they get disorganized people who don’t use an accounting system and filing system (paper or electronic) and they can’t connect it to any bank statements or transactions. They have to think, which one was it, and they have to find the transaction in their backup – whatever form it may be. Maybe it’s in a shoebox, maybe it doesn’t exist – it can be variable. When things aren’t in order, it makes the process extremely difficult. Some people can do it, but having a robust tech stack to go from point to point makes it easy to find what you need and reduce the process’s overall length. The traditional accounting firm relationship is to receive a trial balance at year-end to prepare a T2 Notice to Reader. This doesn’t give you insight into the quality of information you’re receiving and what would happen if the client was audited. Dext helps to change this and starts to give you a greater level of comfort and ease in the quality of information you’re receiving from clients.