Audit.

A word that puts fear in any business owner. I preach to clients and non-clients alike that it is so important to have complete, organized and accurate books. And yet, so many business owners, quite simply, don’t.  Either they aren’t organized, are behind in their paperwork or have inaccurate books; it just doesn’t seem to be a priority. And it should be. Not just because the Canada Revenue Agency might get after you but because you just can’t operate a successful business without knowing your numbers. It’s proven that many businesses will fail within the first 5 years (and beyond) due to poor record-keeping.

Alas, I am writing today to tell you about my experience with client audits. A client came to us because he was being audited for HST. It’s not clear whether he had been doing the bookkeeping himself or whether he had an external practitioner working on it. But, to put it mildly, things were a disaster! Whoever was doing it was grossly incompetent in accounting and bookkeeping. Hence the reason he was being audited. The information that had been submitted to CRA was all wrong and just didn’t make sense. And CRA caught on.

Here I have listed some things that I have learned during various audits and what you desperately need to know!

• Most businesses pay HST either once per quarter, month or year. Few businesses see HST refunds. HST returns should be relatively consistent from one period to the next, barring any major spikes or dips in revenue or expenses. If you regularly remit HST for your business and suddenly you have a big (or even smaller) refund, that is a red flag. CRA does NOT like to give money back to anyone! You can count on being audited.
• CRA digs deep into your financials. And they are allowed to by law. They look at every transaction for authenticity and accuracy. They look in every nook and cranny for discrepancies. And they WILL find something. They will audit you until they do. Even if your books are impeccable. If your books are not in good shape, expect them to start digging even further. They want to know the extent of the errors in your books. The more errors, the more money they get to collect from you.
• You had better have receipts. For everything. Especially larger purchases. The auditor will likely ask to see a sample of receipts. And you don’t get to pick which ones. They handpick which ones they want to see. And if you don’t have it, that expense will simply be disallowed.
• Speaking of receipts….you must have them for all your credit card transactions! Credit card statements are not sufficient! If you claim an expense based on a credit card statement and the auditor asks to see the receipt and you don’t have it, bang..disallowed.
• If things aren’t adding up in the eyes of the auditor, you may be subjected to a full audit. You do not want this! An example of this is if the auditor is reviewing your sales and the invoice numbers are not consecutive, they may suspect that you are taking cash deals and not reporting that income in your books. Then you are looking for real trouble. You had better have a good explanation for non-consecutive invoice numbers.

What you need to know about the end of an audit

The outcome of an audit, 99% of the time, results in the business owner owing money. But not only that, there will be penalties and interest on top of that. The most memorable HST audit I recall resulted in the business owner owing over $80 000 in HST alone! Then the penalties and interest were added. Now, in many cases, the business owner can settle on a reasonable amount to pay. But imagine the panic getting an HST bill of that size!

That isn’t all. What about the cost of having a qualified bookkeeper or accountant fix all the errors? I’ve seen the accountant or bookkeeper bills run into $15 000 to $20 000 just to get the books correct. Nobody needs that kind of pressure or expense. We all need to sleep at night.

How to choose a qualified bookkeeper

That brings me to hiring a qualified bookkeeper who can keep you on track. In our case, for as little as $175 per month, you can be current, accurate and compliant. Then you can sleep at night. Does having good record-keeping mean you won’t get audited? Of course not. But it will make it far less painful and keep the amount owing at a minimum.