The Auditor Is Calling. Here’s Everything You Need To Know to Survive a Hotel Audit

Voted dead last on every hotelier’s “favorite things to-do list” is preparing for that dreaded financial audit. However, if one thing is certain, we know the tax man will eventually call.

Hotels are audited roughly once every three years, on average, and while ownership is ultimately responsible for responding and participating, all the key stakeholders in a property are typically involved in the process. 

David Lund, the Hotel Financial Coach, says hotels are passive targets for financial audits. “We've collected all this money and they've entrusted us with calculating all the tax properly – setting up our codes and our packages and our room allotments and all those things correctly,” he says.

The last thing you want is to be caught by surprise when the auditor calls. There are tools and strategies you can put in place now to make sure proper accounting procedures are being followed across the board, and other best practices to ensure you are prepared for an audit.

Below, we caught up with Lund to discuss financial audits in the hospitality world. Whether you just received notice that your records are under review or you want to stay ahead of the game by preparing for the inevitable, these best practices should have you escaping a hotel audit mostly unscathed.

Q: What is the difference between an internal audit and an external audit?

Lund: If you're a big hotel company, you're going to have your own internal auditors, and they're going to go to the hotels and test compliance. Hotel companies have policies – how to look after receivables, inventory, and cash, how to do your bank reconciliations, etc. Companies can hire external auditors to come in and test those procedures to ensure they are in compliance. 

The audit you’re probably going to fear most is a government audit, and usually this comes from the city. The city will typically have their own auditors, and on a rotating basis, they'll come and see you. It's onerous, and they're going to find money.

Sales tax audits – those are the ones that are going to bite you because they’re likely going to find something that has been done improperly and they're going to give you a bill when they leave. 

Q: What documents are auditors typically looking for? 

Lund: Let’s look at a sales tax audit, for example. City auditors are going to use their programs to calculate the amount of tax that should have been paid, and they're going to use your general ledger listing where you book all your revenue. They're going to look at your PMS reports in detail and even at the specific codes that you use to build your packages and such.

That's where the devil is in the details; if you're not calculating the right amount of room tax on a package, you are going to get clobbered. Imagine you sold thousands of those packages in the past five years – you’ll be assessed a penalty and interest as well as the tax that wasn’t calculated properly. 

Another area they’re fond of investigating is comp rooms. If you're not inputting the right amount of tax on a comp room and paying the city or the state, they're going to nail you on that. Because of this, hoteliers really should make sure they have different reservation codes for comp rooms compared to “house-use.” If you're a banquet waiter and I need you to stay overnight, I don't have to pay tax on that, whereas if I’m comping a room for a family trip, I do.

Q: What does the audit process look like?

Lund: Typically, auditors will physically visit your hotels because they need to look at your records. With everything digitized and so many more things online, it's very possible that they could omit some of that. But they typically start by paying a visit to the hotel, and they need to figure out what you have for reports. 

Hotels are set up differently, in many cases, so they'll basically rummage around and figure out how you do things. They typically want to spend some time with your income auditor or whomever's remitting the taxes. They want to know how you calculate the taxes you pay, what source documents you use, and then they take those source documents and basically do their own calculations. 

They'll go and come back, and you’re probably looking at a couple of weeks, maybe even longer.

Q: What best practices do you recommend to prepare for an audit?

Lund: If you've ever been involved in setting up codes inside of a PMS system and doing an allocation for a package that includes anything more than just a room, you know that it's tricky stuff. It's not uncommon at all to find POSs and PMSs that are not set up properly. Just imagine you’ve had the same PMS and you've been making the same small mistake for seven years. It's going to cost you a small fortune.

The key to financial audit compliance is having clear policies. Many management companies will have some procedures, but they don't have a complete accounting manual. It's also common for companies to mix policies and procedures. 

It’s also imperative for hotels to test for compliance. Even if you think you've done it right, you have to test it. Hotels often don't go in and look at all of the different postings from the previous night and test each reservation code to make sure it is performing calculations properly.

Go Digital to Streamline the Process

The adoption of digital tools in finance and accounting, including moving night audit reports online, has proven instrumental in streamlining the audit process. Otelier’s automated signature workflows and compliance dashboards ensure hotels are storing all the correct documents, and modern accounting tools produce accurate reconciliation and ledger data.  

With automated accounting tools, indexed data and standardized reporting, hotels can ensure they’ve got the proper procedures in place to survive a financial audit.

David Lund is an international hospitality financial leadership pioneer. He has held positions as a Regional Controller, Corporate Director, and Hotel Manager with an international brand for over 30 years. David recently released a book, “The Prosperous Hotelier,” and offers 1-1 coaching, team workshops, and speaking opportunities.