If a business breaks the rules of accounting and ethics, it can be liable for legal sanctions against it. One reason legal sanctions are levied is due to the ability of some unscrupulous business operators to deliberately deceive the business’ investors and lenders with false or misleading numbers in the financial reports.
That’s where audits play a very important role in protecting the public, because an audit is one way to keep misleading financial reporting to a minimum. CPA auditors are like highway patrol officers who enforce traffic laws and issue tickets to keep speeding to a minimum. An audit examination can uncover problems that the business was not aware of.
After completing an audit exam, the CPA prepares a short report stating that the business has prepared its financial statements, according to generally accepted accounting principles (GAAP), but also specify where it has not. All businesses that are publicly traded are required to have annual audits by independent CPAs.
Those companies with stocks listed on the New York Stock Exchange or Nasdaq must be audited by outside CPA firms. For a publicly traded company, the expense of conducting an annual audit is the cost of doing business; it’s the price a company pays for going into public markets for its capital and for having its shares traded in the public venue.
Although federal law doesn’t require audits for private businesses, banks and other lenders making loans to private businesses may insist on audited financial statements. If the lenders don’t require audited statements, a business owner will have to decide whether an audit is a good investment.
Instead of an audit, which they can’t really afford, many smaller businesses have an outside CPA come in on a regular basis to look over their accounting methods and give advice on their financial reporting. But unless a CPA has done an audit, he or she has to be very careful not to express an opinion of the external financial statements. Without a careful examination of the evidence supporting the amounts reported in a financial statement, the CPA is in no position to give an opinion on the financial statements prepared from the accounts of the business.