Audit Readiness Checklist for Ecommerce

Transcript

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Hey everyone, my name is Jeff. I'm the head of marketing at A2X, e-commerce accounting automation software for the world's leading Shopify, Amazon, eBay, Etsy, and Walmart sellers, as well as

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their accounting partners. And speaking of accounting partners, I'm joined today by Lonnie Bloom, partner at WHam.

For those that don't know with them, they offer a full audit and compliance stack for e-commerce businesses, including tax and advisory services and financial

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audits. And I'm going to emphasize financial audits because that's the topic that we're going to be diving in today.

Um, we have a ton of great contacts and information around this topic, including an audit preparedness checklist that the WHM team has put

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together and that Lonnie is going to walk us through so that if you are in preparation for an audit, please keep watching. This is going to be an amazing resource.

So, Lonnie, I just want to say thank you so much for joining us. I hope I did my W with them description

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justice, but if not, you mind providing a little bit more context in terms of who you are and what WHM is all about? >> Yeah, sure.

Thanks, Jeeoff. Appreciate you having me on.

Uh, so Lonnie Bloom here, audit partner. Been at WHIM for about 14 years.

Uh, WHam's a top 20

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accounting firm in the US, uh, with servicing 15 plus different industries. uh I sit in our technology emerging growth vertical and I co-lead our e-commerce sector uh which is within our uh our technology vertical.

So from an e-commerce perspective think VC PE back

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startups from really early stage through growth even IPO readiness and public companies as well. Uh we help those e-commerce brands build scalable finance operations and prepare for investor grade audits.

Uh so you know anything from uh audit audited financial

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statements to corporate tax, sales tax, uh individual founder tax, uh and then going into advisory. We do everything from ERP implementation to cyber security and insurance etc.

Uh so kind of think of us as a one-stop shop for all of your CPA needs as you're as

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you're growing, as you're scaling and and kind of looking through uh you know to to to get to a a final stage, a mature stage, an exit strategy, etc. So, uh, yeah, looking forward to to jumping into to audit readiness.

>> Awesome. And I'm especially excited to talk about, uh, audit readiness today

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because, you know, A2X, we talk about how it helps you deliver accurate accounting and, how that helps with tax and financial visibility, and we know that it also helps with audit readiness, but it's a topic that we haven't really dived into um, in context. So, it's

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going to be great to pick your brain and your expertise on this given the fact that you guys are quite clearly uh you know pros in this particular area. That said, I do want to make mention uh a little bit of a disclaimer before we dive into today's topic.

This video

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contains general information only. So, if you are preparing for an audit, uh please make sure to consult with a qualified professional, Lonnie and the WHIM team as an example.

Uh we'll have their link in the description below if you want to get in touch with them. All right, Lonnie.

So, let's start from the

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top. What does audit readiness mean for an e-commerce business?

And more importantly, what type of e-commerce businesses need to care about audit readiness? >> Yeah, it's a good question.

So, when I think of audit readiness, I think about

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proactive preparation for financial scrutiny. Uh what that means is when you're an early stage e-commerce brand and you're looking to raise capital uh you're looking to get acquired or you have some sort of regulator uh you know you have scr financial scrutiny from

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those third parties. Uh so getting ready for your audit means cleaning up your books making sure you have accounting policies documented making sure you have systems in place that are scalable internal controls that are sound.

Uh and it's really not just about compliance.

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It's about building sort of that trust and transparency into your financial environment. Uh types of businesses that care about this.

If you're an e-commerce brand that is raising capital, so it's really depends on how capitalized you are. You could bootstrap a company and

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never need an audit. Although I wouldn't recommend it.

I think I think it's important to h to have that financial visibility. Um but if you're raising capital from VC, PE, etc., or you have or you have lenders, a bank that's interested in your financials or you have a strategic exit um that you're

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planning whether it's an IPO or or or more of a strategic acquisition uh you should care about financial compliance and and sort of building that trust, building the transparency um and and getting ready for an audit. >> Which is a good segue to to my next question because I'd imagine that most

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of the people who are watching this video likely have an audit on the horizon. So, we'll get into kind of like audit preparedness and and I think Lonnie, you've also prepared a great checklist that we're going to go over, but before we dive into that, I just have one question.

Like, how long does

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an audit usually take, especially for those people who are getting into their first one? >> Yeah, it's a good question.

And yeah, I don't think anyone's going out and looking at audit videos for fun. Um, so yes, whoever's listening is probably gearing up for one.

Uh, an audit could

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take anywhere. you know, the fastest audit I've seen it gets done in 10 days because we're working 24/7 around the clock and um everyone's motivated for a certain reason.

Um but a typical audit uh six first year audit I would say 8 to 10 weeks is is a typical timeline for a

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first year audit and that's if all the information is available, reconciliations are done, people are are available to respond to audit inquiries. um if you don't have those right resources, that first-time audit could take 10 months, right?

So, so it really

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really depends. >> That's a great point and and a wonderful segue into how to actually get ready for an audit to kind of shorten that timeline as much as possible.

I know that you produced an awesome checklist. So, I'd love for us to to go through it

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if that's okay with you. >> Yeah, sure.

So, uh so this audit readiness checklist was was developed for e-commerce finance teams. So when we think about a first when we think about a business growing a growing business we think about in different stages.

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stage one just foundational setup. So I'll start there.

This is an early growth uh e-commerce company. Uh just implemented their first ERP or in a in a in a good accounting software.

Uh you know the first step to me is getting a chart of accounts that is properly

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mapped to your financial statements. Making sure you know have an idea of what your financial statements will look like.

uh you have reconciliations in place, you're reconciling your bank statements, monthly credit cards, payment processors, etc. Uh your key accounting policies, you're documenting

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um revenue recognition for one, are you compliant with ASC 606? If you're if you're under GAP, uh do you have leases ASA42?

Are you properly accounting for those? So, um making sure you have the right folks in place to to understand the accounting rules and and and get your

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books in order. um organizing documentation.

So when you when you go through the first-time audit, your auditors are going to request contracts, invoices, cash receipts, etc. Making sure you know where those are are stored.

Um you know, to me, everything's

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digital nowadays. So, so um you know, making sure you have a secure place to store all of those.

Uh when I started auditing, we would go into a client's uh office and actually look through file cabinets and look at papers and uh that that that time that day is no longer uh

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today's day and age. So um making sure everything's secure.

Um if you're if you have inventory, if you're an inventory based e-commerce business, uh you're likely you have a either owned and operated warehouse or you're working with the 3PL. establishing that relationship under having visibility

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into that warehouse and doing cycle counts is is uh something that's important for an e-commerce business. Um so that's stage one and then from a team perspective uh I would say when you're getting ready for an audit make sure you have the right team members to uh kind

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of man that process. So having a controller, having a you know whether it's outsource accountant or senior accountant on staff, uh designating someone that will be that liaison between the auditors, um but also a liaison between your 3PL, um making sure

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you have visibility into kind of all your different processes. Uh because when you when you get to that first year audit and you get a checklist of a hundred uh items your your auditors want to see, uh someone's got to supply that and spend time to do that.

So, making sure you have the right resources. Um,

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stage two, when you're scaling, this is, you know, when we typically see first audit requirement, you're a scaling business. You might have a series A investor that, you know, really wants to look under the hood and get get a sense of those financial statements or you took out some debt.

Uh, your lender,

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your bank wants to look at financial statements. The milestones here we we kind of list out a few, but automation I think is important when you're thinking about order to cache from a revenue reconciliation perspective.

You know, we do cash proofs when we look at revenue recognition. Uh making sure you're

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you're you have integrations between your Shopify store, Stripe, Amazon, etc. Uh investing in software and investing in tools that will help reduce those manual reconciliations and just improve efficiency.

uh from operating

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>> plug. Yes.

>> Oh, go ahead. Uh so that's this is where ATX will fit in perfectly because if you're going to invest in in tools and software and third parties, A2X that's exactly where you would fit in is is

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that operational maturity stage. Um and that that will help auditors feel more comfortable with the book.

So I totally agree that's A2X will will certainly help the audit process there. Uh from an operations perspective, you know, you

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think you want to know how much cash you have, how much liquidity you have to make that next investment. Uh implementing a rolling 13we cash flow so you have that visibility uh weekly into cash flows.

Uh you and you're able to make decisions from a liquidity perspective. Uh inventory is a big big

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part of it too. Inventory management, right?

performing reconciliations um from your 3PL to your to your books. Uh making sure your value inventory evaluation is accurate.

This is where we see a lot of the the big issues on a first year audit where you have a 3PL,

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you have your QuickBooks or Netswuite, your accounting software, and they're not really speaking to each other. Um so when we go and do an account, we look at the inventory doesn't reconcile to the books and we're running around trying to figure out, you know, where are the where are the issues.

So having clear

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inventory management reconciliation at the skew level uh having policies around that's going to be important. Uh and then internal controls we we we have to gain an understanding of your internal controls at on your key processes whether it's a cash receipts process, payroll, cash dispersements.

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making sure you have the right workflows there and segregation of duties. Um so from a team evolution this is where we say okay make sure you have an F fPNA function um from an operational perspective you know your founders your your your man management wants to know

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uh what the future looks like for forecasting uh you know make sure you're doing inventory counts at your 3PL's uh oftentimes we get to a 3PL and it's the first time that our client has been there in a while and uh there's a lot of

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issues right so making sure you have someone that's that's kind of managing that process. Um, variance reporting, budget to actuals, making sure you're kind of uh looking at that in real time to to flag discrepancies to to catch issues as they as they come.

Um, and

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then just one of the issues we we see is when we look at contracts and we review them for re revenue recognition from an accounting perspective, it's written by the sales team. the marketing team has a big eye on it, but the accounting team is usually the last to hear about it and

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then that they write a contract in a way that it might create accounting issues. So making sure there's just alignment between different departments I think is important.

Uh so that's kind of stage two uh operational maturity but we could kind of go on to stage three you know this is audit and exit readiness. this

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is a mature company whether it's a series A series B um you've you've grown tremendously from a revenue perspective you're getting a lot of traction and market visibility um this is another time where we see first time coming for an audit uh I I'll go back and say being

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proactive um about audit audited financials about finan about your financial statements if you're going out to raise capital uh this is where you don't want to get to a stage where you're gearing up for an exit and it's imminent and it's six months from now there you have buyers uh you know

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waiting to to look at your financials and it's the first time you're engaging an auditor uh six months for that turnaround is uh is very doable but you have to get the right resources you have to make sure you have all the stuff you know your controls in place and things like that um so this is where we want to

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make sure you're preparing your gap compliant financial statements um you're conducting internal readiness assessments making sure you have a financial reporting package um that's sharable pretty easily. It's not something you have to build for the first time.

Uh you know, from an

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operations perspective, you have dashboards where you see real-time data. Uh you can make decisions in real time.

Uh you're compliant from a sales tax perspective. That's a big issue we see in diligence.

Uh are you sales tax compliant? Are you using thirdparty experts to to understand where there's

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potential exposure? uh you know that that's an area where where there's a there's a big focus especially if you have a product that you're selling online and you're selling in you know all 50 states across the country across the globe um there could be issues there uh inventory management you know having

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an integrated system with your ERP so having having a man management system that connects with your ERP uh there's reconciliation tools out there there's there's uh there's softwares to to assist with this but um that's another area we we we like to spend time on. Um

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and then things that you you know you might not think about to the very end is is your inventory subject to uh uh obsolescence. Do you have to establish a reserve for obsolete damage slowmoving inventory?

Um it's an estimate. It's it's something that management should

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take a look at and understand what what kind of products do you have? what is your skew mix and are there slowmoving SKs that you know you probably won't sell you know at at cost even um so are you recognizing those at the lower of cost or net realizable value there's there's u those are the questions your

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auditor's going to be asking you uh and then be again being proactive getting getting a sense of what an audit request list is going to look like and how long is that going to take uh it's going to be important uh team perspective it's just more strengthening that internal controls

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strengthening the IT uh general controls. We ask questions about change management and different softwares, who has access, things like that.

Um, and then making sure you have that key hire, whether it's a controller, it could be outsourced at this point, but at this point, I think when you're more mature, you kind of developed an in-house

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accounting finance team, but having that audit liaison is going to be important. Um, so I'll go I'll go to stage four.

Stage four, a lot of our clients are coming to us. You're they're they're a mature company now.

they're growing and now they're talking about a strategic

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exit, whether it's an IPO or a strategic acquisition. Um, depending on how you depending on which route you plan to go, intend to go, that kind of changes how we would look at you guys from an audit perspective.

Um, but it really just focuses on getting your uh financial

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statements investor grade ready. uh establishing timelines uh making sure you have a clean cap table understanding of the cap table what's on there uh from a legal and tax perspective um h you know centralizing your finance function uh continuous controls

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especially if you're going into the public eye if you're going to IPO there there's there's a higher level of scrutiny when you get to that level um and then from a team perspective it's you already have a auditor engage you've been doing it for a couple years you have a strategic advisor ers, bankers if you're looking for an exit. Um, you

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know, and then you have uh a CFO or s sort of someone elevated to that sort of finance role. Uh, but yeah, that's a that's a typical kind of life cycle of a of an e-commerce business that we see.

We work with stage one all the way through stage four and beyond. Um, so I

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hope that's helpful. You know, I think it's interesting to kind of talk through that life cycle because well, whoever's listening, whether you're in stage one or stage four, um I'm sure, you know, if you're in stage four, I hope you're getting your audit done already, but if you're in stage one, you know, start thinking about it.

I think it's important. >> I think a resource like this is

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especially helpful because most of the businesses, regardless of what stage they fall into, are doing a large part of what you've outlined in the checklist. But we we talked to tons of e-commerce businesses as well as outsource accounting firms.

They're not

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necessarily doing all of it, right? Because not all of it is necessarily relevant when they're not preparing for an audit.

But given that this gives the full picture, it could really help you identify where you're at, what you have in place, and what you need to get in place to prepare. Um, so I'm excited

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that you've just gone through this checklist. We will have the checklist uh in a link in the description below for you to get access to it and then if you have any questions about it you can obviously reach out to to Lonnie and the WHM team.

So that was awesome from uh an audit preparedness perspective. I do

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have a question. I want to double click on the A2X piece uh for just two seconds.

How does better transaction level automation like what A2X provides? And you talked about kind of that, you know, automate what you can piece change the scope, timing or cost of an audit

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from your perspective. >> Yeah, absolutely.

Uh automation is is very important that and you guys kind of fit into that like that stage two, stage one, you're ramping up, you're looking into automation tools, you're looking into uh reconciliation tools. That's

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exactly where you guys fit in. you have sort of really transactional level data and it's you're it's a really manual effort to get that data into something that is audit ready or you know ready to go to your management committee your your board your uh your CEO and founder

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uh you want real- time data you want those real-time insights so that management can make operational decisions quickly uh far too often we go into a client that doesn't really invest in automation doesn't invest in technology ology and they're living out of spreadsheets and there's, you know,

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one person, their controller that owns that spreadsheet and is the only person that really knows how to make it work. Then that controller leaves, right?

And and then they have to hire someone and teach them how to uh, you know, do all these manual reconciliations. There's a lag.

There's a two-month lag where

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things fall apart, right? And there's no one there to sort of run the ship.

Uh, and from an accounting perspective, there's a lot of holes. So if you look at like if you have that two-month window where no one was running the ship and uh you know that's where we see a lot of issues uh and that leads to uh

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slower audits because too many too many holes. It leads to higher cost because now we're spending time our time helping you try and reconcile an inventory report or a revenue schedule deferred revenue schedule.

So I think the investment in automation, the investment

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in sort of third-party advisors to get you audit ready like A2X, right? You guys are sitting in a perfect position to help these companies get to a point where you could go through an audit and it could actually stick to the timeline that that you plan because you're not

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going to find a lot of issues. The reconciliations are going to be clean.

you know, it's g it's going to be easier for us to do a flux analysis and to and to audit inventory and deferred revenue and revenue and all the the main groups um the financial statement accounts because because you made that investment

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early. >> Yeah.

And and that's an area that you just talked about kind of like the controller with kind of the spreadsheet and a lot of people transition from that to us and and one of the pieces that they particularly like isn't just on the automation and the timesaving side, it's

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also on the accuracy side given that A2X is the most accurate solution on the market. Like Lonnie, I have a question for you.

Not to put you in a corner, but like and this could be a quickfire answer. gut reaction when a client comes

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in to do an audit like from your perspective. How do you feel when they are already using A2X versus not?

Like what's what's your reaction? >> Yeah, I've done it enough times where if I go into an audit prospect and they

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send me a trial trial balance financial statements and they tell me, you know, kind of who they're using for their advisors, their softwares, etc. And if they say we're not really using anyone, it's kind of, you know, we're keeping it inhouse.

We haven't really thought about policies before reconciliations or

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automation. I know that 8 month 8 week or six to 8 week timeline that we're hoping for, I know it's going to drag out and we've seen that so many times where, you know, it's just going to take forever.

If they say, "Oh, we're working with

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A2X. We have reconciliations.

have clear audit ready reporting packages, my job just got so much easier. And then I could actually deliver, you know, a more transparent story around the audit because I know what's coming.

I know

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there's going to be clear reconciliations and clear um workp papers that I can audit. Uh so it makes it makes our lives a lot easier.

So yeah, I we appreciate when when we see you guys uh in the mix. >> I love that.

So, uh, I'm not going to

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put words in your mouth, but it sounds like you're saying that not using A2X would be a mistake, which is a good segue into my next question, which cheap, fairly cheap joke. >> What are the top mistakes that you would

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say e-commerce businesses make that it's extend audit timelines or increase audit fees? Now you you could obviously skip past the A2X component, but yeah, I would love to hear the most common mistakes that you run into.

>> Well, obviously it's not using A2X, right? That's that's mistake.

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>> Yeah. >> Uh we talked about a few things, right?

We talked about inventory, right? Not not collaborating with your 3PL properly, not having the right reconciliations or visibility into your inventory management system and how it's

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connected to your ERP. I think for an e-commerce business, that's one of the biggest issues we face.

Uh sales tax compliance, you know, you know, and then corporate tax compliance. Are you actually filing where you're supposed to?

Have you done an assessment? If you done a light assessment, you might not

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you might be missing something, right? Getting the right folks there to to assist with that.

That comes up in diligence a lot. Sales tax, uh revenue recognition, do you do you have a rec revenue recognition policy?

and are you reconciling revenue accurately? Uh that

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is another area where we we come into a lot of issues. Um and then you know again the manual reconciliations lead to more prone to error you know introducing automation and then controls making sure you have controls in place.

We work with small accounting teams that might not

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necessarily have the right folks to implement sophisticated controls but at least you you have to have some sort of controls to to get us more comfortable with an audit process. >> Love it.

All right, thanks for that Lonnie. I appreciate it.

And I guess like the last question that I ha have is

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if a client is not audit ready but they know that one is coming down the pipe because they have you know one of the objectives that you've identified earlier in the conversation. What services does with them offer to get them up and ready up and running

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relatively quickly? >> Yeah.

Um, so if if you if you know one is coming and you haven't really thought about, you haven't talked to any CPAs and gotten quotes or anything like that, talk to us for 30 minutes. We can look at your financials.

We can give you a sense of what that timeline would look

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like, what the cost would look like. We could do it at a very high level uh or or more kind of granular approach.

But you know what we what we can do to help g gear up a company for an audit? uh we can uh do a pre- audit readiness assessment.

We look at your cap what

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where I would focus is your policies, your major policies, revenue recognition, lease accounting, um cap software. Uh and then look at your cap table from inception through today.

Have you issued safe notes? Have you issued warrants, stock options?

There's

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complexities around a cap table that have accounting impact that you may not even be thinking of or have not recorded on your, you know, financial statements which any auditor is going to look at that and ask day one, hey, have you thought about evaluation around your warrants, >> right? >> You know, and you may not be thinking

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about that. So, kind of a pre- audit readiness checklist we could go through together.

Um, we could do we could help with your monthly books from a, you know, from that perspective as well. uh inventory, sales, tax consulting.

We could kind of talk through what that

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would look like. Um and then just, you know, again, looking at all of your accounting policies and getting you ready for an audit, I think is is where we would live.

>> Love that. Hey, Lonnie, I just want to thank you again so much for sharing your expertise and experience uh here with us

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today. We will have links in the description below for the checklist as well as information on how to get in touch with Lonnie and the WHM team.

Thank you so much. uh for watching today's video and we'll see you soon.

>> Awesome. Thanks, Jeff.

Thanks for having

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me.

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