The work your audit firm is doing that management should own

There is a specific dynamic that develops inside smaller public companies over time, usually without anyone deciding it should happen. The finance team is stretched. A technical accounting question arises mid-cycle. The audit firm is already engaged, knowledgeable, and reachable. They provide a view. That view becomes the conclusion. The conclusion goes into the accounting memo. The memo gets filed.

A year later, the same question comes up. Someone pulls the prior memo. No one examines too carefully who wrote it.

Repeat that pattern across a few reporting cycles and the audit firm has become the de facto technical accounting resource for the company. Disclosure schedules get drafted in a way that anticipates auditor preferences rather than management’s own review. Close timetables get organised around when the audit team arrives rather than around what a strong internal process requires. The finance team becomes skilled at responding to audit requests rather than at building the reporting infrastructure that reduces them.

This is not a compliance failure in the obvious sense. There is no missed deadline, no restatement, no SEC comment letter. The filings go out on time. But the process that produces them has a structural dependency that costs more than it appears to, carries risk that management has not fully evaluated, and puts the audit firm in a position that its own independence standards were designed to prevent.

This article explains how that dependency develops, why it matters, what it costs, and what a properly structured reporting process looks like for a smaller public company.

1. What auditors are there to do, and what they are not

An audit opinion gives investors, lenders, and regulators independent assurance that a company’s financial statements are fairly presented in accordance with US GAAP. The independence requirement is not procedural. It is the entire basis on which the opinion has value. If the audit firm helped prepare the work it is auditing, its opinion on that work does not mean what an independent opinion means.

The SEC has codified this through its auditor independence rules under Regulation S-X Rule 2-01, which prohibit audit firms from providing certain non-audit services to audit clients and restrict others where the provision of those services would impair independence. The rules identify specific categories of prohibited services, including bookkeeping, financial statement preparation, and management functions. They also establish a principles-based test: an auditor is not independent if a reasonable investor, knowing all relevant facts and circumstances, would conclude that the auditor is not capable of exercising objective and impartial judgment on all issues encompassed within the engagement.

The key phrase in that test is management functions. When an audit firm drafts technical accounting papers, builds the disclosure schedules, or structures the close process, it is performing work that the SEC considers a management function. Management is responsible for the financial statements. The auditor’s role is to audit those statements, not to prepare them. When that line blurs, the audit opinion rests on a weaker foundation than either management or investors may realise.

What the rules say about non-audit services

The independence rules do not prohibit all non-audit services. Audit firms can and do provide tax services, transaction advisory, and other consulting to clients, subject to specific conditions and approvals. What the rules restrict are services that place the auditor in a position of acting as management or auditing its own work.

Preparing or reviewing financial statements in a way that substitutes for management’s own analysis is one example. Designing or implementing accounting systems is another. Advocating for a client’s accounting position with the FASB or the SEC is a third. What each of these has in common is that the audit firm would be placed in the position of auditing conclusions it had a hand in reaching.

Audit committees are required to pre-approve all non-audit services provided by the external auditor. In practice, this approval is often granted on a blanket basis at the start of the engagement year, without detailed examination of what specific work the audit firm will actually perform. When the finance team routes technical accounting questions to the auditors informally, outside the pre-approval process, neither management nor the audit committee may have a clear picture of the scope of non-audit work being performed.

Why audit firms often do it anyway

Large and mid-tier audit firms are sophisticated enough to know where the independence line sits. When they provide technical accounting guidance, drafting support, or close process assistance to smaller audit clients, they are typically managing the risk within their own professional standards rather than ignoring it. They may document their conclusions as ‘advice’ rather than ‘preparation.’ They may require management to sign off on accounting positions before finalising them. They may limit the scope of what they provide to avoid crossing specific bright lines.

But the structural effect on the reporting process is the same regardless of how the work is characterised internally. Management has outsourced judgment it is supposed to exercise. The documentation that supports the financial statements has been shaped materially by the firm that will audit it. And the company is paying for extended procedures and consultation that a better-resourced internal process would not require.

The practical reality for smaller public companies

• An audit firm providing extended technical accounting support to a smaller public company is not necessarily acting improperly under its own professional standards. But it is filling a gap that management has created by not building sufficient internal accounting capability. The cost of filling that gap with audit firm time is consistently higher than the cost of filling it with dedicated internal or outsourced senior accounting support.

2. How the dependency develops across the reporting cycle

Understanding how audit firm dependency becomes structural requires looking at the reporting cycle as management experiences it, not as it is described in the audit engagement letter.

The quarter-end close

For a smaller public company with a lean finance team, quarter-end close is a compression of everything that needs to happen simultaneously: finalising the general ledger, preparing consolidation entries, running variance analysis, preparing the board reporting package, and beginning the 10-Q preparation process. All of this happens within a window of three to four weeks, under deadline pressure, with the same small team that handles day-to-day accounting for the rest of the quarter.

When a technical question arises during close, the default behaviour in a team without dedicated technical accounting resource is to ask the audit firm. The auditors have been working with the company for years. They know the accounting policies. They have views on complex areas. And unlike a standalone technical accounting consultant, they are already engaged and already billing.

The question gets answered. The close proceeds. The issue is that the answer originated with the audit firm, the documentation of that answer was shaped by the audit firm’s analysis, and management has not independently verified the conclusion. Management has accepted it. Accepting and verifying are not the same thing.

The 10-Q and 10-K filing process

The external reporting process for smaller public companies typically begins in earnest after close is complete, leaving a compressed window for 10-Q preparation before the filing deadline. For non-accelerated filers, the 10-Q deadline is 45 days after the end of the fiscal quarter. For accelerated filers, it is 40 days. For large accelerated filers, it is 40 days. The annual report deadline for non-accelerated filers is 90 days. For accelerated filers, it is 75 days.

Within these windows, the finance team must prepare the financial statements, draft the MD&A, prepare supporting schedules and rollforwards, coordinate with legal on disclosure review, and support the audit or review procedures that the external auditors perform before the filing goes out.

In companies where the reporting process is well-structured, most of this work is complete or substantially advanced before the audit team arrives. The audit or review becomes a check on work management has already prepared. In companies where the dependency has developed, the audit firm’s fieldwork and the preparation of supporting materials happen simultaneously, with the finance team and the audit team working through disclosures and schedules together in real time.

The latter approach looks functional from the outside. The filing goes out on time. But management has not independently reviewed and approved the disclosure package before the audit team has shaped it. The sequence is reversed from what the independence rules contemplate.

Technical accounting papers

Technical accounting papers, sometimes called accounting memos or position papers, document management’s analysis and conclusions on complex or judgmental accounting matters. They are the primary evidence that management has evaluated the applicable accounting guidance and reached an independent conclusion before applying it to the financial statements.

They are also among the most frequently audit-firm-influenced documents in the reporting packages of smaller public companies.

The typical pattern is this: a complex accounting question arises, usually in connection with a new transaction, a contract change, a new revenue stream, or a first-time application of an accounting standard. Management does not have the time or the specialised technical accounting depth to research and document the applicable guidance independently. The audit firm is asked to provide its view. The audit firm prepares an analysis. Management reviews the analysis and agrees with it. The analysis is reformatted as a management memo and filed as the basis for the accounting treatment.

The paper is signed by management. But the analysis is the audit firm’s. If the accounting treatment is subsequently challenged, by the SEC in a comment letter, by a successor auditor, or by a new audit partner taking a fresh view, management may not be in a position to defend the conclusion without returning to the original audit firm for support. The paper exists, but the judgment behind it does not sit with management.

Disclosure schedules and financial statement support

Financial statement disclosures for smaller public companies are detailed and require significant supporting work: rollforward schedules for debt, equity, and intangibles; fair value disclosures for financial instruments; lease disclosures under ASC 842; revenue disaggregation schedules under ASC 606; segment information; and earnings per share calculations, among others.

These schedules are management’s responsibility. They should be prepared by the finance team, reviewed internally, and presented to the audit team as completed work for review and testing. In practice, for companies where the dependency has developed, the schedules are often prepared collaboratively with the audit team or reviewed by the audit team before management has reviewed them fully itself.

The consequence is that management may be signing off on financial statement disclosures it has not independently verified. The audit team has reviewed the schedules, which creates a comfort that management may not have earned through its own review process. This is not the same as management control over the financial statements.

3. What the dependency actually costs

The costs of audit firm dependency sit in three places: the direct cost of audit fees that reflect the absence of internal capability, the operational cost of a reporting process that management does not control, and the risk cost of accounting positions and disclosures that management cannot fully defend.

Direct audit fees

Audit firms price smaller public company audits based on the complexity of the work and the time required to complete it. When the company’s internal accounting processes are weak, close support is required, technical accounting is undocumented, or disclosure schedules arrive late or incomplete, the audit requires more time. That time is billed.

The relationship between internal accounting capability and audit fees is direct but rarely examined. Finance teams tend to treat audit fees as an external cost driven by the audit firm’s pricing rather than as a cost partly driven by their own process quality. A company with strong internal close processes, completed supporting schedules, and independently documented technical accounting positions requires less audit time than a company without those things. The difference in fees is real and consistent.

For a smaller public company paying $300,000 to $600,000 per year in audit fees, a 15 to 20 percent reduction from improved internal processes represents $45,000 to $120,000 per year. That saving is not guaranteed, and it depends on the audit firm’s willingness to reduce scope as internal capability improves. But it is a realistic outcome for companies that invest in building proper accounting infrastructure.

Extended procedures and non-audit billing

Beyond the core audit fee, companies that rely on audit firms for technical accounting support, disclosure drafting assistance, and close process guidance pay for that work separately, either as additional audit procedures billed at audit rates or as non-audit advisory services billed at advisory rates.

This billing is often opaque. Technical accounting consultation may be absorbed into audit hours without appearing as a separate line item. Assistance with disclosure language may be characterised as ‘review and comment’ rather than preparation. Management may not have a clear picture of the total cost of non-audit support it is receiving or how that support is characterised for independence purposes.

The practical test is to ask the audit firm to break down, by category, the services it provided in the prior year and the hours allocated to each. Most companies that do this exercise find the non-audit component is larger than expected, and that a meaningful portion of what they are paying for is work that a properly resourced internal team would handle without external assistance.

The rotation and transition risk

Audit firms rotate engagement partners periodically, and companies change audit firms for various reasons over the course of their life as a public company. When a new audit team takes over an engagement, it brings fresh eyes to accounting positions and disclosures that the prior team had accepted. Positions that were comfortable under one engagement team may be challenged under another.

For companies where technical accounting documentation was substantially driven by the prior audit firm, a change in auditor can expose positions that management cannot independently defend. The reasoning behind the accounting treatment exists in the prior audit team’s workpapers, not in management’s own analysis. The new auditor has no obligation to accept the prior firm’s conclusions. It will form its own view, and management will need to support that view with documentation it may not have.

This is not a theoretical risk. It is a consistent pattern in smaller public company transitions, particularly in revenue recognition, lease accounting, and equity-related areas where the applicable guidance is complex and the prior accounting required significant judgment.

SEC comment letters

The SEC’s Division of Corporation Finance reviews a percentage of public company filings each year and issues comment letters when it has questions about accounting treatments, disclosures, or the basis for significant judgments. Smaller reporting companies are reviewed less frequently than larger filers but are not exempt from the process.

When a comment letter arrives, management must respond within the time specified, usually 10 business days, with a detailed explanation of the accounting basis for the position challenged. If the technical accounting position was substantially developed by the audit firm rather than by management, the response preparation requires going back to the audit firm for the analysis. That takes time, costs money, and may not produce a response that is consistent with what management would have said if it had developed the position independently.

Strong comment letter responses come from management that understands its own accounting in depth. That understanding is a product of management owning the technical accounting process, not of management reviewing conclusions reached by others.

4. What should sit with management

The boundary between management’s work and the auditor’s work is not difficult to locate in principle. Management is responsible for the financial statements and all supporting documentation. The auditor’s role is to audit that work. Every part of the reporting process that feeds into what management is responsible for should be prepared, reviewed, and owned on the company side of the process.

In practice, this means the following.

Technical accounting documentation

Technical accounting papers should be drafted by management or by an adviser working for management, not by the audit firm. Management should reach its own independent conclusion on the accounting question before seeking auditor input. The auditor’s role is then to review and challenge that conclusion, not to form it.

The sequence matters. When management forms the conclusion first, the audit review is a genuine check. When the audit firm forms the conclusion and management accepts it, the review is circular. The paper says what the auditor believes, and the auditor then reviews it.

Technical accounting papers should address the specific facts of the transaction or arrangement at issue, cite the applicable accounting guidance, walk through the analysis, document any alternative interpretations considered and why they were rejected, and state management’s conclusion clearly. Papers prepared at this standard can be defended independently of the audit firm, can withstand auditor rotation, and provide a clear basis for responding to SEC comment letters.

Common areas requiring technical accounting documentation for smaller public companies include revenue recognition under ASC 606 (particularly for multi-element arrangements, variable consideration, and principal versus agent questions), lease classification and measurement under ASC 842, equity and stock-based compensation under ASC 718, business combinations under ASC 805, impairment testing under ASC 350 and ASC 360, and foreign currency under ASC 830.

Disclosure preparation and review

Financial statement disclosures, including the notes to the financial statements and the MD&A, should be drafted by management and reviewed internally before the audit team sees them. The audit team’s role is to review disclosures that management has prepared, not to be involved in their preparation.

This requires that management allocates time within the close and reporting cycle for internal disclosure review. In practice, this means having a draft of the financial statement notes ready before fieldwork begins, having the MD&A in draft form before the audit team reviews it, and having supporting schedules completed and internally reviewed before they are provided to the auditors.

Disclosure review should be a management process. The CFO or senior finance leader should review all disclosures for accuracy, consistency with the financial statements, and alignment with the company’s public narrative before the audit firm is involved. What the audit firm sees should be a draft that management has already approved in substance.

Close process ownership

The month-end, quarter-end, and year-end close process should be designed and owned by management. The close timetable should be set based on what the internal reporting process requires, with the audit or review fieldwork scheduled to begin after close is substantially complete. The audit firm’s arrival date should not determine when close is done.

A well-designed close process for a smaller public company includes defined close timetables for each period, assigned ownership of each closing task, a checklist of required reconciliations and supporting schedules, a technical accounting review step before the trial balance is locked, and a management review of the reporting package before it goes to the audit team.

Companies that build this infrastructure find that the audit or review process becomes significantly more efficient. The audit team receives a package that is complete and internally reviewed. Questions are answered promptly because the underlying work is management’s own. Fieldwork runs faster. Fees fall.

Accounting policy documentation

US GAAP accounting policies should be documented, kept current, and owned by management. They should reflect the company’s actual accounting practices, updated when the business changes, when new standards are adopted, or when the prior policy is no longer appropriate.

Many smaller public companies have accounting policy documentation that was prepared when the company first went public and has not been updated since. The business has changed. Revenue streams have evolved. New leases have been entered into. Acquisitions have been made. But the accounting policies in the financial statement notes reflect the company as it was at the time of the original IPO, not as it is now.

Keeping accounting policies current is management’s responsibility. When policies are out of date, the financial statements may not accurately reflect how the company is actually accounting for its activities, and auditors will identify the gap during fieldwork. Updating policies reactively under audit pressure is more disruptive and more expensive than maintaining them proactively.

5. Building the internal accounting infrastructure

Smaller public companies face a genuine capacity challenge. The reporting obligations of a listed entity do not reduce to match the size of the finance function. A company with 50 employees and three people in finance has the same 10-Q and 10-K obligations as a company with 500 employees and a 20-person finance team. The SEC does not distinguish.

The solution is not necessarily to hire a larger internal team. For many smaller public companies, the cost of a full-time senior technical accounting hire cannot be justified by the volume of work. The solution is to build the right structure around the capacity that exists.

What a properly structured reporting process looks like

A smaller public company with a lean finance team can maintain a controlled, management-owned reporting process if it has the right structure in place. The structure typically involves three elements working together.

The first is a close timetable that is realistic and enforced. This means setting close deadlines by task, assigning ownership clearly, and building in enough time between the end of close and the start of fieldwork for management to review the reporting package. Companies that run close to the deadline every quarter are not managing their process. They are reacting to it.

The second is a technical accounting function that sits on the management side. This does not require a full-time hire. It can be provided by a senior finance adviser engaged specifically for this purpose, by a fractional CFO with technical accounting depth, or by a specialist firm engaged to support the company’s technical accounting needs. What matters is that the function exists, is independent of the audit firm, and produces documentation that management owns.

The third is a formal management review process for all external reporting. Before anything goes to the audit team, it should have been reviewed and approved by senior management. This review is not a rubber stamp. It is a substantive check that the disclosures are accurate, the financial statements are consistent with the underlying accounting, and the MD&A tells the story that the numbers support.

The role of senior finance advisory support

For smaller public companies that cannot justify a full-time senior technical accounting hire, the most efficient structure is typically a combination of a capable internal team handling the operational close and an experienced external adviser providing technical accounting support, disclosure review, and reporting process oversight on a retained or project basis.

This structure works because it puts senior accounting judgment on the management side of the process, where it belongs, without the fixed cost of a full-time hire. The adviser works for management. The documentation they produce is management’s documentation. The positions they reach are management’s positions, reviewed and approved by management, supported by analysis that management can defend independently of the audit firm.

The audit team then reviews that work. Its fieldwork is focused on auditing management’s conclusions rather than on helping management reach them. The process is cleaner, the documentation is stronger, and the audit is more efficient.

When to put this structure in place

The right time to build proper reporting infrastructure is before it is urgently needed. Companies that wait until they receive an SEC comment letter, face a difficult audit, or approach a transaction that requires clean financial statement documentation will find the process of building infrastructure more expensive and more disruptive than it would have been if addressed earlier.

The triggers that typically indicate it is time to address the reporting process include: audit fees increasing year over year without a clear increase in business complexity; fieldwork running longer than planned for more than two consecutive reporting periods; technical accounting papers that management cannot explain without reference to the audit firm’s analysis; disclosures that are reviewed by the audit team before management has completed its own review; and close processes that are not complete when audit fieldwork begins.

Any one of these, on its own, does not necessarily indicate a structural problem. Multiple together, or any of them recurring across more than one reporting period, indicate that the reporting process needs to be examined.

6. The question worth asking

If your audit firm stepped back from the non-audit support it currently provides, what would your next quarter-end close look like?

This is not a rhetorical question. It is a diagnostic one. The answer tells management something useful about the structural dependency of its reporting process.

If the answer is that the close would run on time, the technical accounting would be documented, the disclosure schedules would be complete, and the audit team would receive a reporting package that management had fully reviewed, then the reporting process is in reasonable shape. The audit firm may still provide useful input, but management is not dependent on it.

If the honest answer involves significant disruption, delayed filings, undocumented positions, or a close process that requires audit firm involvement to function, then the dependency is structural. Management is relying on the audit firm for work that the independence rules contemplate management doing itself. The audit firm is performing management functions, which means its independence is more complicated than the engagement letter reflects, and management is paying for external support that is substituting for internal capability it does not have.

Addressing a structural dependency does not require dismantling the relationship with the audit firm. It requires building, alongside that relationship, an internal accounting and reporting process that management owns and can operate independently. The audit firm’s role then shifts from being part of the preparation process to being what it is meant to be: the independent reviewer of management’s work.

That shift reduces audit fees. It produces stronger documentation. It makes the reporting process more resilient to auditor rotation, SEC scrutiny, and transaction due diligence. And it puts management in the position it is supposed to occupy: fully responsible for, and fully capable of defending, the financial statements and disclosures that carry its name.

That is what a controlled public company reporting process looks like. It is also, if pressed, what most auditors would say they prefer to audit.

About Brolma Advisory

Brolma Advisory supports smaller public companies and businesses preparing for public-company reporting requirements with senior-level US GAAP accounting, technical accounting documentation, and audit-ready close processes.

Brolma Advisory also supports smaller public companies, listed-group subsidiaries, and businesses preparing for public-company reporting requirements with SEC reporting, 10-K and 10-Q preparation, technical accounting, and audit-ready close support.

If your reporting process needs more structure before the next filing deadline, we can help.

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