Procedural documentation - Important in the context of a tax audit and as a business management tool

Requirements for procedural documentation

Procedural documentation is understood to mean specifying in writing the workflows, procedures and processes in a company. It ensures that conformity of the financial accounting with the applicable rules and regulations is guaranteed and that a competent third party will be able to understand the processes. Under Section 146(1) of the Fiscal Code (Abgabenordnung, AO), taxpayers are obliged to maintain records and to document these in such a way that makes it possible for the tax authority to verify the accuracy of the declarations. The procedural flows are described from the origin of a situation and including the processing in the financial accounts through to the final tax return.

The requirements for procedural documentation for digital systems are detailed in the ‘Principles of Proper Keeping and Retention of Accounts, Records and Documents in Electronic Form’ (Grundsätze zur ordnungsmäßigen Führung und Aufbewahrung von Büchern, Aufzeichnungen und Unterlagen in elektronischer Form, GoBD). This includes, in particular, the following aspects:

• completeness of the documents
• comprehensibility of the procedural flows
• verifiability and availability of the documents
• inalterability of the information

The absence of procedural documentation by itself would admittedly not be deemed to be a formal deficiency. However, if the data is not flawlessly traceable and verifiable then the lack of procedural documentation could (partially) contribute to the financial accounts being rejected, which would entail revenues having to be estimated for the basis of the tax assessment. By contrast, well-structured procedural documentation will comply with the requirements of the tax authorities and would minimise the potential risks in the case of external tax audits.
 

Practical example

A sole proprietorship carries out cash transactions every day. In order to ensure that the accounting for cash transactions conforms with the applicable rules and regulations, the internal processes and safeguards relating to the cash register that are applied are described in the procedural documentation. This includes, among other things, clear instructions for the cashier that unambiguously explain how to handle the cash register and the cash. Procedural documentation ensures that all procedures and process flows in the company are precisely and comprehensibly described. The technical aspects of the application program likewise come into play. This makes it easier for the auditors to understand the business transactions.

Business management benefit

Apart from the significance for tax audits, procedural documentation also has a business management benefit. For example, in many organisations the introduction of e-invoicing is taken as an opportunity  to drive forward digitalisation. The parties involved here examine in detail, in some cases for the first time, the digital media and the company’s financial accounting processes. In this connection, the parties analyse how an efficient process can be structured. Unnecessary workflows can be identified and this can create spare capacities. Regular reviews result in the creation of a continuous process of improvement. Recording this in writing creates transparency and ensures the consistent quality of the employees’ work results.