Blog Series: 4 Catastrophes a Good Audit Trail Can Help You Avoid
Post 2 of 3
2. Investigation by the IRS.
Nobody likes the word audit much—but don’t confuse it with audit trail. An audit trail can actually be an important tool in helping you avoid an IRS tax audit.
Fundamentally, an IRS audit is about inquiring into the legitimacy of your records. In the same way you can rely on the audit trail to make sure nobody is getting one over on you, the IRS is interested in using it to determine the same thing. In fact, the IRS has even specially trained over 1,000 agents to be experts in the audit trails of particularly common small-business accounting software accounting like Sage 50 (Peachtree) and Quickbooks.
The Journal of Accountancy recommends that businesses always keep audit trails on. Here’s their logic:
Practitioners do not want the IRS to perceive that its client’s internal controls are weak. When the IRS requests records with associated audit trails, all of a taxpayer’s recording errors are exposed, and the agent can make conclusions based on entries that are reversed or corrected… If the IRS concludes that a taxpayer’s controls are weak, the IRS may expand the audit. Some practitioners have suggested that their clients turn off the audit trail indicator on QuickBooks. Regardless of the reason, that approach is not advisable, because it will immediately raise the audit agent’s suspicion.
3. Lending or funding rejections.
It’s not uncommon for lending institutions to want to review accounting records as a part of loan qualification process. Access to an audit trail report can help prevent lending rejections.
Most lending institutions will require a profit and loss statement for any business loan decisions—especially if credit is unestablished. In fact, the SBA.gov website lists a P&L statement as one of the main items on their loan application checklist.
Providing an audit trail increases a lending institution’s confidence both in the records themselves and the financial management capabilities of its stewards. In some cases, an audit trail may actually be a requirement, if a lender deems it necessary to complete a full financial audit of the records.
The relevance of audit trails can apply to other funding sources as well. Non-profits applying grants may need to provide audit trail logs to demonstrate the integrity of financial records, and business investors doing due diligence may want this data as well.
The third and final segment in this series will show the relevance of audit trails in avoiding compliance infractions and a conclusion on how to put audit trails to work for you and your business. Stay tuned!
Adam Bluemner is a Project Specialist Manager at Find Accounting Software. He and his colleagues have been helping businesses like yours find top field service software options since 1996.