If you currently own a business or have owned a business of any kind you would probably agree with me that businesses have many different needs in order to operate at optimum levels in the various departments of which they are comprised. From advertising and eventual sales of its products and/or services, to reporting earnings and determing profits and/or losses and everything in between, the business entity employs many tools, resources and personnel while utilizing the services of various different professionals to help it meet and satisfy certain governmental requirements. Among such professionals are independent auditors, our topic of discussion.
Indpendent CPA auditors are like referees in the financial reporting arena. The CPA comes in, does an audit of the business’s accounting system and methods and writes a report which is attached to the company’s financial statement. Publicly owned businesses are required to have their annual financial reports audited by independent CPA firms and any privately owned businesses have audits done as well because they know that an audit report will add credibility to their financial reports.
An auditor judges whether the accounting methods of a given business are in accordance with generally accepted accounting principles (GAAP). Generally, if everything is in place, the financial report is a reliable document. But in some cases an auditor will wave a yellow or red flag representing some indicators of potential trouble including, when the business’s capability to continue normal operations is in doubt due to what are known as financial exigencies. This could mean a low cash balance, unpaid overdue liabilities, or major lawsuits that the business doesn’t have enough cash to cover.
An auditor must exercise professional skepticism, meaning that the auditor should challenge current accounting methods and reporting practices of his/her client in order to make sure that its financial statement conforms with accounting standards and are not misleading or, put another way, that the financial statement is fairly presented. Indeed, the words “fairly presented” are the exact words used in the auditor’s report.
Adherence to GAAP
A good auditor need technical know-how, but also needs to know how to be tough on the accounting methods of his/her client since the job requires that s/he is to be the agent of the shareholders and other users of the business’s financial report. It’s incumbent on an auditor to strictly uphold GAAP, and not let slide (so to speak) any irregularities. Recently there have been known to be a number of well-known companies that engaged in accounting fraud which was not discovered by the CPA auditors. Enron is one such company and in this case, the auditing firm, Arthur Anderson, was found guilty of obstruction of justice because it destroyed audit evidence.
As stated in he opening paragraph of this article, a business does have many different needs in order to operate at optimum levels, but the professionals on whom a given business depends must at all times maintain a certain level of integrity – the highest level – which can only be acheived by unmitigated independence and insulation from any fraudulent or even questionable influences by management personnell of the client company. it can be said that as much as businesses need independent auditors, those outside professionals need impenetrable insulation from bad actors.
SPONSORED As an Amazon Associate I earn referral fees from qualifying purchases.