Why do your auditor and your MIS disagree?

The audit finishes and the profit figure is ₹40 lakh lower than the one the management pack reported across the year. Nobody in the company can explain it. The auditor can, in a way that involves four words the founder has not heard before, and the meeting ends with everyone slightly less confident in both sets of numbers.

This is routine and it is worth understanding, because the explanation separates two very different situations. Most of the gap is ordinary and expected. A small part of it is a signal that the management numbers were misleading all year, and telling those apart is the entire exercise.

They are built for different purposes

A management pack exists so that people can run the company. It is fast, it is directional, it prioritises being available on the eighth over being exact, and it is allowed to use estimates.

Audited accounts exist so that an outside party can rely on them. They are prepared under accounting standards, reviewed by someone whose job is to be sceptical, and they prioritise being right over being timely.

Both are legitimate. Neither is the real one. A company that treats the audited accounts as truth and the management pack as an approximation has the relationship slightly wrong: the pack is what you steer with, and the accounts are what the outside world relies on.

The pack is for deciding. The accounts are for relying. Asking which is correct is the wrong question.

The six ordinary reasons

1. Cut-off

The largest single cause in most companies. A management close happens on a date, and invoices that arrive later get posted to the month they arrive in rather than the month the cost belongs to.

An auditor tests exactly this. Costs incurred in March and invoiced in April belong in March, and moving them back changes both years. The same applies to revenue delivered in March and invoiced in April.

It is the most fixable cause, and the fix is an accruals discipline in the monthly close rather than anything the auditor can do.

2. Provisions the auditor requires

Three come up repeatedly in Indian startups, and all three are usually missing from a management pack.

• ·Gratuity. Nothing is payable until five years of service, so companies recognise nothing for four years and then take the whole cost at once. An auditor expects it accrued from the start, at roughly 4.81% of wages a year, and often supported by an actuarial valuation.
• ·Expected credit losses on receivables. An auditor will look at what is more than six months overdue and ask what is genuinely collectible. A management pack that carries every invoice at full value is overstating both profit and assets.
• ·Leave encashment, where employees can carry leave forward and be paid for it. It accrues as the leave is earned, not when it is taken.

3. Depreciation and capitalisation

The management pack expenses a laptop; the accounts capitalise it and depreciate it over three years. Or the reverse: something the company capitalised should have been expensed.

The useful lives an auditor applies come from the schedule in the Companies Act, and they are frequently different from whatever the company chose informally. On a business without much in the way of assets this is a small difference. On one with equipment, fit-out or capitalised development cost it is not.

4. Revenue recognition

The gap that matters most for software and services companies. A management pack often recognises revenue when invoiced, because that is easy and close enough. Accounting standards recognise it as the obligation is performed.

An annual contract billed upfront in April is one month of revenue in April and eleven months of deferred revenue. A fixed-price project spanning the year end is recognised on progress rather than on milestones billed. A contract bundling a licence with implementation may need splitting between the two.

This one is worth getting right in the management pack too, because it changes what every month looks like rather than just the year.

5. Reclassification

Not a profit difference at all, and it accounts for a surprising share of the confusion. The auditor moves costs between lines to match the statutory format: delivery costs into cost of sales, some overheads into other expenses, foreign exchange gains out of revenue.

The profit is identical and every subtotal moves, so gross margin in the accounts and gross margin in the pack disagree. Founders reasonably read that as an error and it is a presentation difference.

6. Prior-period adjustments

Something from last year was wrong and is corrected this year. It makes this year's audited figure differ from the management pack for reasons that have nothing to do with this year.

A worked reconciliation

Illustrative figures for a fictional company. The management pack reported a profit of ₹62 lakh for the year. The audited accounts say ₹21 lakh.

• ·Cut-off: ₹11 lakh of March costs invoiced in April, moved back into the year.
• ·Gratuity provision: ₹9 lakh, never recognised in the pack.
• ·Expected credit loss on receivables over 180 days: ₹8 lakh.
• ·Revenue recognition on two annual contracts billed upfront in February: ₹16 lakh moved to deferred revenue.
• ·Depreciation on equipment the company had expensed: ₹7 lakh added back, so a favourable difference.
• ·Leave encashment accrual: ₹4 lakh.

That is ₹41 lakh of difference, every rupee of it explainable, and the audited figure is the right one for the outside world. Nothing was wrong in the sense of anyone having made an error.

But look at the list again. Four of those six will recur next year, because they are structural gaps in how the management pack is prepared rather than one-off events. That is the useful finding, and it is available only because somebody built the reconciliation.

Which differences actually matter

A rough test: does the difference change a decision you already took?

• ·Reclassification: no. The profit is the same and nobody decided anything differently.
• ·Depreciation policy: rarely. It affects the shape of the cost over years rather than the cash or the decision.
• ·Cut-off: sometimes. A month that looked good because a cost landed late produced a decision made on a false picture.
• ·Missing provisions: yes. A company that never accrued gratuity has been reporting a cost base 4% to 5% lower than the real one, and every break-even calculation built on it was wrong.
• ·Revenue recognition: yes, and most of all. A pack recognising revenue on invoice overstates a growing business every month, and the hiring decisions built on it were taken against revenue that had not been earned.
• ·Prior-period adjustments: depends entirely on what was wrong and why nobody caught it.

Tax is a third set of numbers

Two sets of books is confusing enough. There is a third, and founders meet it at the first tax computation.

Taxable profit is not accounting profit. It starts from the audited figure and adjusts it under the income tax rules: some expenses are disallowed, depreciation is recalculated at rates the tax law sets rather than the ones the accounts use, and certain provisions are added back until the money is actually paid.

So a company can report an accounting loss and still have a tax liability, which is an unwelcome surprise the first time. The usual causes are disallowed expenses, provisions not yet paid, and the gap between book and tax depreciation.

There is nothing to fix here. The point is to know the third number exists, ask your CA for the reconciliation from audited profit to taxable profit alongside the computation, and budget the cash for it rather than discovering it at the filing deadline.

Closing the gap

The goal is not for the two to match exactly. It is for the differences to be known, expected and small enough that nobody is surprised.

1. 01Build the reconciliation once a year, immediately after the audit, with every difference named and quantified. One page.
2. 02Take the recurring ones into the monthly close. Gratuity, leave and expected credit losses are provisions the management pack can carry monthly, and doing so removes most of the gap permanently.
3. 03Fix cut-off with an accruals routine: a standing list of costs that arrive late, accrued each month at an estimate and trued up when the invoice lands.
4. 04Agree the revenue recognition policy with your auditor once, in writing, and apply it in the management pack rather than only at the year end.
5. 05Agree depreciation rates and the capitalisation threshold once, and put the threshold in your expense policy so nobody has to decide case by case.
6. 06Then set an expectation: the gap next year should be smaller and explainable in five minutes.

Most companies can get from a ₹41 lakh gap to a ₹6 lakh one in a year, and the work is almost entirely in the monthly close rather than in the audit. The remaining difference is usually reclassification and depreciation timing, neither of which anyone needs to act on.

What the auditor is not there to do

Some of the friction in this conversation comes from a mismatch of expectations about what an audit is.

An auditor gives an opinion on whether the financial statements give a true and fair view. They are not checking every transaction, they are not rebuilding your management pack, and they are not providing a view on whether the business is being run well.

So three things founders sometimes expect do not happen. The audit will not tell you your unit economics are deteriorating. It will not flag that your largest customer is 40% of revenue unless disclosure requires it. And a clean report is not a statement that nothing is wrong operationally, only that the statements are fairly presented.

What it will do, usefully, is force provisions the company avoided, test cut-off properly, and apply a consistent recognition policy. Those are worth having, and they are a byproduct rather than the purpose.

The corollary is that nothing in the audit replaces the management pack. A company that waits for the audited accounts to understand its year has spent twelve months steering without instruments and then read the flight recorder.

Why this matters beyond tidiness

Two reasons, and neither is about the accounts being neat.

The first is that a large recurring gap means the numbers you steered by all year were wrong in a consistent direction, almost always flattering. Hiring and spending decisions were taken against a profit figure ₹41 lakh better than reality, and the correction arrives once a year in a document nobody reads until the auditor sends it.

The second is diligence. A buyer or investor reconciles management figures to audited ones as a matter of routine, and a large unexplained gap gets read as weak financial control regardless of the cause. A founder who hands over the reconciliation before being asked has answered the question and demonstrated something about how the company is run.

It is also the cheapest credibility available. One page, once a year, produced by someone who already has all the information.

About Simplify

Simplify is a finance clarity and investment readiness practice working with founders across India, built on six years inside startups. We write about the questions founders bring before a decision, not after it.