Auditing your marketing expenses is an objective and systematic way to verify that your expense management is accurate, reliable, and aligned with industry best practices. It should help your team to identify where your department is under- or overperforming, ensuring that those forecasts and budgets you work so hard on remain consistent.
In this blog, we’ll cover everything you need to know about conducting these audits. Our goal is to ensure your marketing spend is as it should be to give your business the most bang for your buck.
Understanding Tax Laws and Financial Reporting Standards
When auditing your marketing expenses, you must ensure that your finance team complies with the relevant tax laws and financial reporting standards. But what exactly does that mean?
For starters, let’s look at how your marketing expenses affect your taxes. In a nutshell, these can often be written off on your returns. The IRS allows businesses to deduct ‘ordinary and necessary’ expenses on their tax returns. And this includes marketing expenses.
So it’s possible to deduct quite a bit of your marketing spend from your taxes. But keep in mind that there are limits. For instance, you won’t be able to deduct capital expenses, or those which need to be amortized over time. This includes branding projects with long-term benefits, intellectual property, or equipment for new campaigns.
Knowing how much of your spending can be written off under ordinary expenses can have a significant impact on your marketing budget. It will allow you to allocate more money elsewhere. But at the same time, incorrectly estimating your deductible expenses can leave you in the red.
At the same time, you need to comply with IRS regulations specific to marketing and advertising. The tax man requires detailed records of all your expenses, from invoices and contracts to receipts, to justify any deductions. Without supporting documentation, you face the risk of another kind of audit – a tax audit.
Financial reporting standards
We can’t discuss documentation without mentioning financial reporting. Like your taxes, this is governed by regulations. Under Generally Accepted Accounting Principles (GAAP), marketing expenses must be accurately recorded as operating expenses. You’ll need to match all expenses with the revenue they generate, and recognize marketing expenses in the same period you incur them.
Expenses must also be fully disclosed in your financial statements. This is important for transparency and compliance, and essential for stakeholder trust. If your company is public, you have the added risk of penalties in the event of incorrect expense allocation and reporting.
Of course, ensuring that you abide by IRS and GAAP guidelines means you’ll need to keep up to date with any possible changes made by these bodies. And these should be factored into your audit procedures.
Establishing Audit Procedures and Objectives
Not having clear objectives and efficient procedures in place can complicate the process of auditing your marketing expenses.
Ideally, you need an end goal in mind before you start the process. The tax laws and reporting standards we’ve just discussed are usually a good starting point. After all, other than keeping an eye on your spending, one of the primary objectives of a marketing audit is to ensure compliance. You need checks in place to confirm that expenses meet IRS criteria and are appropriately recorded.
At the same time, you need to make sure that your team can identify ways to optimize costs and save money. During the audit, assess how efficient your spending is and look for cost-saving areas. Data analysis can help you pinpoint high-cost, low-return strategies, highlighting where funds could be better allocated.
Developing audit procedures and methodologies
There’s no one-size-fits-all audit procedure for every marketing department or company. But the below guidelines form a good starting point that can be tailored to your business needs:
- Define your goals: Your key objectives should be documented and accessible. Whether that’s increasing your return on investment (ROI), decreasing expenses, or stretching your budget.
- Set clear key performance indicators (KPIs): Data is king, but its real value is in how it’s used.
- Review documentation: Reviewing all documentation for accuracy and completeness can help you ensure that all costs are legitimate, correctly attributed, and within the scope of your services.
- Analyze expense allocation and apportionment: This will give you a fair representation of costs and whether they are compliant with regulatory standards.
- Determine your performance and gaps: Knowing exactly where money is going in and out can help you determine project profitability.
- Conduct a risk assessment: Prioritizing high-cost items or categories prone to misclassification can help address the areas most likely to affect your financial integrity and compliance.
- Establish testing criteria and sampling methods: Reviewing transactions can help you verify expenses accurately, ensuring that they align with policy requirements.
- Outline procedures for reaching goals: Your team should know how your marketing expenses are managed, with checks in place to ensure this is always on track. Include guidelines around pricing agreements, contract negotiation, a list of vetted vendors, and outsourcing policies.
- Set up and verify budgets and resources for all marketing plans: One of the top reasons for overspending is incorrect budgeting and resource allocation.
- Check findings and make recommendations: An audit has little value if it doesn’t let you adjust your strategies and goals to ensure future profitability.
A clear structure will help your team make the most of auditing your marketing expenses, as it will standardize the process.
Identifying Red Flags and Potential Areas of Concern
Auditing your marketing expenses can help you spot potential red flags in your expense management. Below are some of the most common areas of concern.
Expense fluctuation
If you compare current performance to historical trends, and notice any significant or unexplained increases or decreases in costs while auditing your marketing expenses, this can indicate problems. For example, it could signal incorrect expense allocation, fraud, or even unauthorized spending. It’s essential that spending patterns align with your strategic goals.
Lack of documentation
Missing or incomplete documentation could be a sign of poor internal controls or possible fraud. Every expense, no matter the amount, should be backed by contracts, receipts, and approvals that demonstrate their purpose. This requires consistent record-keeping and transparent financial reporting.
Inaccurate expense categorization
Categorizing expenses correctly can do more than help you with tax deductions and compliance. Misclassifying expenses can lead to errors in your financial reports, which affects compliance and stakeholder confidence.
Failure to disclose information
As mentioned earlier, GAAP compliance requires you to accurately disclose expenses in your financial statements. Not doing this can mislead your investors and other stakeholders, especially if you run a public company. And that could lead to legal repercussions.
So how do you avoid these potential issues? A simple solution is through testing and verification.
Performing Compliance Testing and Verification
To ensure accurate recording and reporting while auditing your marketing expenses, test a sample of your transactions. This includes double checking that amounts, dates, vendors, and other details match supporting documentation, like invoices or contracts.
You can also conduct substantive testing, by verifying specific transactions like high-value expenses and trace them back to approved purchase orders or contracts. That way, you’ll guarantee that each transaction is supported by documentation and serves a legitimate business purpose.
It’s also essential to assess your internal controls for expense management. That includes evaluating how effective these controls are, and identifying any aspects that aren’t working, to fix these.
When in doubt, consult a professional
Of course, if you get stuck during any point of auditing your marketing expenses, you can call in a pro. Finance experts with industry experience can either manage the entire process for you, or help with certain aspects. That way, your audits can be run smoothly, and your team can make any necessary changes to ensure they stay on track.
Fusion CPA’s team of dedicated tax pros and CPAs has decades of combined experience in financial management within the marketing industry. For help auditing your marketing expenses, or with your day-to-day financial management, schedule a free Discovery Call with one of our pros.
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.