As audit season approaches, institutions again turn inward: reviewing key accounting areas, tightening compliance controls, and ensuring audit-ready documentation. For many, this annual process is more than a compliance exercise; it’s a chance to reinforce financial discipline and demonstrate credibility to stakeholders, regulators, and investors.
This year’s audit cycle brings heightened scrutiny around several technical areas, from accrued paid time off (PTO) and internally developed software to lease accounting and debt covenants. Organizations that address these areas early and strategically will streamline their audits and strengthen their overall financial governance.
Accrued PTO: Capturing True Liability
One of the most misunderstood audit topics is accrued PTO. Under ASC 710, companies must record a liability for future compensated absences if the obligation arises from past service, rights have vested or accumulated, payment is probable, and the amount can be reasonably estimated.
This obligation applies even if state law does not require payout upon termination, a nuance that frequently leads to errors. The safest course is a proactive one: ensure HR and accounting teams are aligned on the accrual methodology, validation process, and timing of recognition. Accurately capturing accrued PTO prevents misstated liabilities and signals mature internal controls to auditors.
Internally Developed Software: Partnering Across Finance and IT
As organizations invest heavily in technology, internally developed software remains an audit focus. ASC 350-40 requires companies to capitalize costs incurred during the application development stage—activities like coding, configuration, and testing—while expensing preliminary project and post-implementation costs.
The dividing line between these stages can blur without close collaboration between accounting and IT. Early coordination ensures that finance teams receive detailed breakdowns of costs, project phases, and completion milestones. This documentation supports accurate capitalization, preventing both overstatement of assets and under-recognition of expenses.
As one of Richey May’s audit managers put it: “The key is to work closely and proactively with IT from the start. Make sure they understand what information accounting needs (cost breakdowns, timelines, and project scope) so they can properly assess what needs to be capitalized. That makes everyone’s life much easier come audit time.”
Lease Modifications and Remeasurements: Staying Current with ASC 842
Lease accounting remains complex under ASC 842, particularly when modifications occur. Extensions, changes in lease terms, or the addition of new space often trigger remeasurement. When that happens, the lease liability and right-of-use (ROU) asset must be updated, and the discount rate must be reassessed to reflect current market conditions.
Outdated assumptions are the most common issue auditors encounter. Establishing a process for continuous monitoring of lease amendments and communicating those promptly to accounting prevents last-minute remeasurements that can delay audit completion.
Goodwill and Intangibles: Testing for Impairment
While not always a recurring entry on every company’s checklist, goodwill impairment testing has grown important amid economic uncertainty. Triggering events like declining market conditions, loss of major customers, or internal restructuring may require a qualitative or quantitative impairment assessment.
Documenting management’s rationale is as critical as the test itself. A well-supported impairment analysis satisfies audit scrutiny and demonstrates that management is proactively monitoring enterprise value and risk exposure.
Board Minutes, Legal Contingencies, and Debt Covenant Management
Audit readiness extends beyond accounting entries. Board minutes, for example, serve as formal evidence of oversight, approvals, and governance decisions. Ensuring these are properly documented, reviewed, and readily available gives auditors clear visibility into management’s decision-making processes.
Similarly, debt covenant compliance should never be a last-minute review. Proactive calculation and monitoring (ideally performed quarterly) allow management to identify potential breaches early, initiate waiver discussions with lenders if needed, and avoid audit delays. This also supports confidence among financial partners by demonstrating disciplined oversight of capital and liquidity requirements.
Finally, legal contingencies should be evaluated and documented well before the auditors arrive. Management must assess the probability and estimability of potential losses, maintaining transparent communication with legal counsel. This helps ensure that any contingencies are disclosed or accrued appropriately per ASC 450.
Streamlining Audit Fieldwork: The PBC Advantage
The Prepared by Client (PBC) process is a recurring source of audit inefficiency. Reviewing the PBC listing early and assigning internal owners to each item helps management compile supporting schedules, reconcile balances, and respond quickly to auditor requests. This approach dramatically reduces back-and-forth and improves audit timing when coupled with ongoing dialogue throughout fieldwork.
In addition, auditors increasingly rely on digital collaboration tools to exchange documentation securely. Establishing these workflows before year-end allows institutions to maintain momentum once fieldwork begins.
Beyond Compliance: Building Confidence Through Preparation
Preparing for audit season is ultimately about more than compliance; it’s about credibility. By addressing high-risk areas like accrued PTO, software capitalization, lease modifications, goodwill impairment, and debt covenants ahead of time, institutions can turn a traditionally reactive process into a proactive demonstration of operational strength.
The most successful organizations aren’t scrambling to meet auditor deadlines. They use the audit to refine internal processes, reinforce accountability, and build lasting confidence with stakeholders.
