Archives For Financial Audit

Are You Banker Ready?

August 11, 2015

Is there a difference between meeting with a bank and a banker?

You’d better believe it; there is a huge difference! A bank is an institution, brick and mortar; even a staid set of rules and provisions that bank employees apply to the general public. Quite different than dealing with a banker, who is a person which is capable of creating a relationship. A banker is not just a set of rules but a living breathing person; one who has the ability to cast judgement upon you in either a favorable or unfavorable manner depending upon the circumstances. Banking rules have tightened over the last several years. Today we need to operate with a set of standards that makes them want to do business with us.

In the past, before I was enlightened, I had made the mistake of telling clients that they should be bank ready at all times. In fact what I actually meant was that a business, family or an individual would benefit from always being Banker Ready. Being banker ready has several components which will be detailed below, but most importantly is the relationship is established in advance. Just as in personal/non-business relationships to be “known” means someone understands who you are and what you stand for, your character, how you do business or simply operate. Hopefully in this type of a true relationship there would even be an understanding of your hopes and dreams that you desire for your family or business.

Being banker ready allows you to expand your business or personal wealth building through the use of other people’s money. Using the leverage that banks provide has the ability to create wealth much faster than someone who works to continually save in order to invest. Therefore, one who is always banker ready has the potential to act quickly when an opportunity is presented. That doesn’t mean that I encourage acting in a hastened manner, but being prudent doesn’t mean being slow.

Here are 5 facets to being Banker Ready.

Be Organized –

Recall the idea that a banker has the human capability to cast judgement? Being organized allows you to provide accurate documentation in a timely manner. If a banker asks for documents and it takes several weeks to gather them; likely they are out of date or incomplete the banker will not believe that you are on top of your business dealings.

Proper Accounting –

There is a difference between accounting and tax returns. Proper accounting means that you have month in and month out an accurate set of books.


  • Cash Flow Analysis
  • Profit and Loss Statements
  • Spending Plan/Budget
  • Merchant Service Receipts

Proper Tax Returns –

This means that you have accurately filed returns. Depreciation schedules that are accurate, ideally with Cost Segregation Studies included. An important fact in this step is to show that you are profitable. Remember this is the proof that you will be able to repay the banker should they loan you money for your investment/business project or home.

Full Economic Value of Insurance –

Remember that a banker is grading each deal on being mutually beneficial. However, the primary concern of the banker is that they get repaid even if you were to die or become disabled. Maintaining maximum levels of life insurance and disability income replacement insurance allows the investor to collateralize a portion of the insurance to the bank which ensures the bank gets made whole, but most importantly your family also doesn’t suffer bankruptcy or additional loss in the event of death or disability. I have seen a number of deals go south, even prior to getting started, when this wasn’t in place ahead of time.

Relationship –

This means to take an intentional approach to creating a business or even personal friendship with a banker prior to needing their services. Drop in a local bank, get a referral from a colleague (best) all best when done in advance. Each year or quarter you should proactively update your records that the bank keeps on file. Provide them in advance! Include a Personal Financial Statement at a minimum along with any of the banks required documents. This will be a WOW Factor that assures you the best deal/rates when it is time to get a loan or credit line.

These are five tips that will ensure that you are ready to take action when the need arises for a good banker relationship.

Are there others that you practice? Please tweet, connect on Facebook or LinkedIn with any other ideas.

Are You Sure?

October 17, 2014

Being sure is important in business. Being sure allows you to freely and confidently make decisions. So, sure about what you ask? Are you confident that none of your employees are stealing from you?

In my business, we deal with Dental Practices located all over the world. Consistently throughout all of the practices that we serve there continues to be story after story of staff members who have found a way to steal money from the practice. There seems to be a never-ending number of methods that this can occur.

And trust me, when it happens, the numbers can become staggering.

The fraudster is almost always someone who has been there for years and has earned the trust of the doctor or owner. Many times it starts out small, likely even with the intent that they will return the money. Unfortunately, the small amount was intended to solve an issue in their home life but the issue persists. However, when it goes unnoticed and whatever problem existed continues; their judgment slips again and so it goes…..

It isn’t always a masked bandit or a horrible person that will steal from your business. That would make it much easier to identify. Often it is the least person you would ever expect within your organization.

As a business owner you should put safeguards and checks and balances in place to prevent what starts as a temptation into spiraling into something much larger. Some of the checks and balances that our On-Site Practice Analysis Team recommends are:

  • Deposits are made on a daily basis
  • Internal controls over cash
  • Reconcile the books daily
  • Internal audit trails on the practice software; minimum of 1x per week
  • Check the deleted files internally in the practice software
  • Stamp checks “Deposit Only” immediately
  • Different people run audit trails and check each other’s work
  • Carbon Copy of receipts
  • Fidelity Bonding your staff

Just to name a few….

The above are literally just a few of the items that should be completed as part of your internal business processes. Most of these are daily functions so they can’t be just left to chance or performed randomly. It has to become how you operate every single day.

For many small business owners the list above can seem daunting. The thought of trying to train everyone to do these things can be even a little uncomfortable. When in fact this could be suggesting that there is a trust issue. I would encourage you that there isn’t a trust issue, but rather good business processes. It reminds me of one of my favorite quotes.

 “Trust, but verify” – Ronald Reagan

 I will admit that implementing all of these systems can be cumbersome. However, when each of these are in place there is a sense of clarity and peace that comes along with knowing that they are in place. Fear and doubt are reduced which allows the Doctor or Business Owner to concentrate on the other areas of the business.

Whenever a business doesn’t have the time, expertise, or human capital to do certain parts of their business they outsource the job to a professional in that field. My colleagues, some of the brightest CPA’s in the business, serve our clients by taking on these functions and processes for them. I have personally witnessed the relief that occurs when the doctor releases this burden as he outsources this to the professionals. It is like hiring a team of the brightest financial minds at a fraction of the cost of only one employee. Creating this financial team, as an extension of their office staff, provides for the surety that is desired.

So, are you sure?

Even if you answer yes, does it make sense to put these safeguard procedures in place?

 Or, should you outsource this part of the business to a professional for the ultimate in peace and clarity?



How To Ace An Audit

April 30, 2014


This is a guest post from a friend and colleague, Seth Peabody, CPA. Seth is the Director of the Tax and Accounting Division of DDS Financial. Speaking candidly, he is gifted in his abilities as a business person but above all has constructed the coolest accounting team that I have ever been around. Personally Seth is a Husband and Father but seems most inspired when you ask him about his missions work.

An audit seems like misery, and it is actually worse than that when it actually occurs to you. Our practice work with Doctors, Dentists and their associated practices; Seth is speaking as an authority on this subject, heed his advice from the article below which originally appeared in a 2012 issue of Medical Economics.

T. Seth Peabody, CPA

Organizing those bank statements and expense receipts now will save your practice headaches later

As a medical student, you didn’t prepare for the boards the night before. You spent countless hours reading, studying, and reviewing. So why, as a practice owner and decision-maker, would you prepare for an audit only days before the auditor arrives? Any doctor who has been practicing medicine for several years can expect to be audited, and proper recordkeeping prepares you for that day, just as studying and reviewing prepared you for your licensing exams.


Although the chances of a line-by-line Internal Revenue Service (IRS) audit are slim, the pain and suffering of an audit is immense. The IRS 2010 Data Book reports that roughly 70% of all small (corporations with $10 million in assets or less) corporate returns that the IRS audited or examined were changed.

The average recommended additional tax per return for a small corporation was about $30,000, and 62% of all partnership (including limited liability corporation) and S corporation returns under audit were changed. Data do not exist for the change of tax for partnership and S corporation returns, because these information returns are reported on the individual shareholder or stockholder returns. How many practices can sustain a $30,000 reduction to cash flow without making employment changes or accessing a line of credit? Proper record keeping, therefore, is not just essential. It’s critical.


Cost is a key component to recordkeeping for every medical practice, and you will need to consider numerous cost-related factors when preparing for an audit. For example, what are the costs associated with properly recording, organizing, and sorting your records now? On the other hand, what are the costs associated with gathering, recording, and organizing documentation that is several years old for the purpose of an audit?

Today, many records are readily available online. The trouble with online records, however, is that an item is usually posted only for a limited time. A gathering mission for old records in preparation for an audit can take hours or days, time that could be better used serving current patients and developing your practice.

Recently, a new client of ours received a letter informing him he would be audited by the IRS. To be thrifty, the practice owner thought he could handle the accounting and tax preparation function and audit defense alone. After the first meeting with the auditor, however, the doctor engaged our firm. He had not kept proper records for several years.

We were assigned the task of reconstructing the information and attempting to reconcile that information with the audited return. It cost $7,000 in accounting fees to reconstruct just 1 year of financial information, roughly $1,000 in check fees, and several hundred dollars for monthly credit card statements.

In all, we estimated it cost the practice $10,000 to reconstruct and gather that 1 year’s worth of transactions. In addition, the physician was forced to use countless hours of his personal time acquiring the necessary information and reports. Not only that, he had to spend additional hours with us recalling the transactions that were not originally documented. In short, his “thrift” wound up costing him time and money.

Keeping records up to date always is less costly than having to scramble to pull records together at the last minute with the auditor standing on your doorstep. The necessary records often are inaccessible, if not nonexistent, making it much more difficult to retrieve them several years after transactions occurred.

Unorganized and/or improperly stored records and the delayed recording of transactions may cost a practice additional taxes, penalties, and interest, as well as increased professional fees. Trying to prepare for an audit at the last minute can get expensive surprisingly quickly.


  • Keeping financial records current is easier than finding them later if you are audited.
  • Information is available from the IRS on what records you will need for an audit.
  • Reconcile financial statements regularly with bookkeeping software.
  • Keep tax returns and bank statements.


To record and store records properly, it is important to understand what an IRS auditor will review to substantiate information reported on a return. Auditors believe that a practice’s financial information should mirror, or easily be reconciled to, its tax returns. Those financial statements also should reconcile to bank statements and other financial records.

The next important information consideration is the documentation the auditor will request to substantiate a tax return. What the IRS is looking for is not a mystery. The U.S. Treasury Department has produced a video guide to an IRS audit that is available for downloading at The video clearly explains what an auditor will examine and the questions that will be asked during the audit process.

A wealth of additional useful information is available on the IRS Web site, including training and audit manuals for specific industries and professions that you can download for reference. The IRS also provides standard questionnaires for each type of audit. If you receive an audit letter, it will outline what specific information you will need to substantiate your return.

Below are a few examples of standard items you will probably be asked to produce during the course of an audit:

  • The auditor will request prior and subsequent federal, state, sales, payroll, and personal property returns to analyze whether your records agree with the auditor’s records. The goal is to compare what you reported originally with information in your practice’s records, and with information reported on returns you filed with any other agencies.
  • The auditor will review your personal tax returns to determine whether the information you reported on them reflects and reconciles with the return under audit.
  • The auditor will request the financial statements from your practice, including ledgers, journals, aged receivables and payables, trial balances, bank reconciliations, credit card statements, and other worksheets and schedules. Often these statements are difficult to produce without bookkeeping software and proper record storage.
  • The auditor may request W-2s, 1099s, and specific forms and schedules within the returns—for example, an in-house fixed asset listing or schedule, and the fixed asset schedules reported to another taxing authority.
  • The auditor will request schedules from the practice software showing the number of patients treated and the type of work performed on patients, to determine revenue. The auditor will analyze the information for any unreported income.



Several issues can prolong or increase the severity of an audit. More work is created to substantiate records when your audited return does not agree with your other financial records, even if you have submitted the return correctly. Other problems arise when the revenue reported on your income tax return is less than the revenue reported on your sales tax return. You will need to explain the discrepancies in detail and reconcile them.

Discrepancies create an immediate impression that your return probably is incorrect. Once this idea enters the auditor’s mind, it may be difficult to erase and get him or her back on the path of auditing and not looking for every minor error. This attitude almost certainly will wind up costing you additional time, and time is money.


Good records are critical, because not having them can lead to underpaying or overpaying taxes. In addition, well-kept records are essential during an audit to answer questions accurately and to the satisfaction of the auditor. Organized and controlled recordkeeping will minimize the tangible and intangible costs of an audit.

How can you achieve proper recordkeeping? By following these suggested procedures and examples on a weekly, monthly, or quarterly basis. In general, the frequency should be determined by the number of monthly transactions, but the number of monthly transactions should not be the overall determining factor. If you have a solo practice in a rural area, you may need only to perform the procedures quarterly. If, however, you are in a practice with several doctors in a metropolitan area, it may be necessary to perform the procedures on a weekly basis.

Below are a few tips to ensure proper recordkeeping:

  • Invest in appropriate accounting software for recording transactions.
  • An experienced bookkeeper should perform monthly reconciliations of credit card and bank statements, receivables, payables, inventory, and other accounts, using bookkeeping software.
  • Keep a record of all cleared checks, both physically and digitally. A digital format acts as insurance should the physical copy be lost.
  • Never use business accounts to pay for personal expenses, or vice versa.
  • The practice manager should place strict controls on all checks and credit cards. For example, a doctor’s spouse should not use a company credit card, even if the transactions are recorded against distributions or dividends.
  • Documentation is important for reported balances, expenses, income, and transactions. The audit may be conducted on a return filed 3 years earlier. Remembering what happened last year is difficult enough. Trying to remember specifics about something that happened 3 years ago is unimaginable.
  • Arrange for a certified third party, such as an accountant, to perform weekly, monthly, or quarterly bookkeeping services. The current market rate for an experienced bookkeeper is $50 to $100 per hour. Cutting corners is more harmful in the long run and leads to higher professional fees to defend an audit. The old saying “Don’t be penny-wise and pound-foolish” always comes to my mind when involved in an audit of a practice where the “bookkeeper” was a spouse or an office manager with no accounting experience.
  • Remember that just because the financial statements have been reconciled does not mean the transactions have been recorded properly. Reconciling means that the information is in the system, but it may not necessarily be recorded to the correct account. Periodically review the details of the transactions, general ledger, or detailed balance sheet and income (profit and loss) statement to ensure the accuracy of recorded transactions.
  • Review your accounts receivable, collections, and other reports (outside of the accounting software) to ensure that collections were deposited to the practice’s bank account. Even though the software and bank statement reconcile, it does not mean everything was entered. A difference could indicate fraud.


  • Keeping financial records current is easier than finding them later if you are audited.
  • Information is available from the IRS on what records you will need for an audit.
  • Reconcile financial statements regularly with bookkeeping software.
  • Keep tax returns and bank statements.


Most business owners do not know that an annual credit card statement is not sufficient to substantiate business expenses. It is important, therefore, to know what records to keep to minimize the impact of an audit and be able to substantiate business expenses. Credit card companies do not keep copies of receipts, so your practice is responsible for keeping receipts and documenting the business purpose of each transaction.

Document expenses by properly storing and notating the receipts, paying particular attention to meals and entertainment, travel, and related party transactions. For meals, entertainment, and travel expenses, record on the receipt itself who, what, when, the discussion topics, and the general purpose for the expense.

Additionally, transactions involving related parties, such as a consultation with a relative or rental payments to a building the practice owns, will receive detailed scrutiny. Related party transactions need to be documented as to the business purpose and fair market value of the transaction.

Bookkeeping software is vital for organizing your practice’s expenses, revenue, and other financial information. In addition, the development of online banking makes it easier than ever to record your practice’s financial information. Today it is possible to download your banking and credit card information in seconds rather than having to enter each transaction separately.

Keeping track of expense receipts is crucial for an audit. At a minimum, place receipts, bank statements, canceled checks, and other documentation together in a box marked for the tax year. Storing the information electronically and backing it up on at least a weekly basis is highly recommended.


The statute of limitations for an audit generally is 3 years, but tax returns, bank statements, and closing documentation should be stored indefinitely.

In 2011, I defended a client during the audit of a 2006 return. During that process, the auditor wanted my client to substantiate the purchase of land and the construction of a building that occurred in 2000. The land was purchased with cash, and to make matters more interesting, the client had no documentation for the construction of the building. When we contacted the builder, we learned he had no records, either. In this case, however, we were able to successfully and creatively argue the cost of the construction and improvements because the auditor was cooperative. We were extremely lucky not to have any change of tax for this particular audit. Do not expect auditors always to be so cooperative.

Proper recordkeeping is essential to operating any business. In addition, the owner of a successful medical practice understands the practice’s cash flow because he or she records the transactions and stores the documentation appropriately. Taking the aforementioned precautions will provide your practice with the weapons you need to defend your filed returns successfully against an audit.


My Summary – Todd Burkhalter

Hopefully you will never experience an audit from the Internal Revenue Service. However, they are cracking down and it is becoming more common. I would encourage you to follow the advice that Seth has provided above. Let us know if there is any way that we can serve you or your practice.