The buy-side Quality of Earnings team is claiming our historical gross margins are overstated because we did not allocate our operations team's wages to cost of goods sold. How do we defend our historical margin presentation using our Accountability Chart?

Question

Tyler Smith · Accepted Answer

The buy-side auditor wants to push your operations team's salaries into cost of goods sold to shrink your gross margins and make your business look less scalable. To defend your numbers, you must show a clear, logical division of labor. This is where your Accountability Chart is your best weapon.

Your Accountability Chart defines the exact roles and responsibilities for every seat in your organization. Review the seats in question. If your operations team members are primarily focused on system maintenance, platform development, or general administration rather than direct client delivery, they belong in sales, general, and administrative expenses, not cost of goods sold.

Sit down with your integrator and pull the roles and responsibilities from the Accountability Chart for each disputed employee. If their daily activities match the SG&A classification, present this functional breakdown to the auditor. Show them that these individuals are not directly tied to the unit cost of delivering your service.

If the auditor still pushes back, use your historical time-tracking data or project management logs to prove that these employees spend the vast majority of their hours on non-delivery tasks. This data-driven approach removes subjectivity. By tying your financial reporting directly to your operating system's organizational design, you demonstrate that your margin presentation is based on operational reality, not accounting tricks.