How one Accountant Audited a Particularly Puzzling Project with 15 Subsidiaries

By PRETTY BOOKS ON September 22, 2020

BEHIND THE SCENES is a  collection of stories about relationships, challenges and wins in the day to day world of accountancy.

There is no typical day in the office for an accountant. They might start each day at the same time checking a work email, but after that, anything goes. Between business emergencies, problems emerging with books, reconciliation issues and beyond, accountants become much more than just number crunchers. They’re also firefighters, shoulders to lean on, friends, and allies.

All accountants have a unique approach, meaning no two accountants work the same. Ledgers that aren’t managed by you will take a little bit more more time. In order to understand how things are being accounted, it will require investigation, imagination, and sometimes reverse engineering.  

The accountant was called in to help a new client with an audit project. She was tasked to double check last year’s accounting work and create a financial set that consolidates 15 interrelated companies. This involves identifying possible eliminations, which are transactions that represent trade between the companies that needs to be accounted for.

Before the accountant could create the financial set, she first needed to understand and digest data from books she never worked on. Accounting is not a follow-the-blueprint profession. Every person has their own way of doing things and the accountant had to read each company’s book to build a mental map of its relationships to one another. She had to understand the way the interrelated companies worked together to find transactions between them.

“It’s a challenge. You have to go through all the subsidiary accounts in order to find out the connection and to make sure they balance.”

The second puzzle is trying to figure out what type of relationship each subsidiary has with each other. Companies can be a customer, contractor, owner, or all of the above for another company. The accountant had to sort through the complicated twist of relationships and find out which companies were related and how.

“It was like a puzzle box that you opened just to find another puzzle box inside.”

Once the family tree was established, the accountant was able to start looking for transactions between the subsidiaries. She went through thousands of transactions each company made over the year to see which ones overlap. She then had to complete an elimination entry to remove any double accounting of revenue and expenses. Since all the subsidiaries were within the client’s business family, a lot of transactions counted the same money twice.

“If you do business with a family member, it’s not really business. Say I get a dollar and give it to my brother. We both say report that we gained a dollar, so my family should have two dollars. But it’s the same dollar that was just traded down the line.”

In order to complete an elimination entry to true up the books, the accountant had to reverse the transaction in the consolidated financial set. In order to reverse it, she would have to figure out its origin story and what happened. In this audit, it took a lot of imagination and trial and error.

“It was like a puzzle box that you opened just to find another puzzle box inside. And you didn’t know how many more puzzle boxes were inside that one or how deep they go. But the closer you get to solving a box, the more excited you get to see what’s inside.”

Companies have two types of transactions which can make it difficult to pinpoint the origin. There are monetary and nonmonetary exchanges. Every accountant has a unique approach to accounting. The accountant had to step into the other accountant’s shoes and imagine the books from their perspective.

The accountant put on her investigative hat and used logic and her understanding of the previous accountants to narrow down the possibilities of where this transaction’s origin could be. For each transaction, she would dig in deeper to find data that supported her hunch and proved her theory of what happened. If the data didn’t logically and mathematically support her hypothesis, it was back to square one.

“I don’t think I slept. At least not well. There were a couple of times I woke up in the middle of the night with an idea, and I could not get back to sleep until I tested it out.”

The accountant was able to complete the audit after an intense investigative journey that required mathematics, analytics, imagination, and a lot of puzzle solving.

“The audit was intense, but I never got bored. The more pieces I solved, the more I wanted to keep going, even if it meant that I barely slept that night. It was such a thrill when I got a piece to fit that I had to go work on the next one.”

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The information provided in this post is for general informational and educational purposes only and is not a substitute for professional advice. Consult your financial, business, or tax advisor with respect to matters referenced in this post. Pretty Books assumes no liability for actions taken in reliance upon this information.
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