The Auditor's Role: Company Outsiders Need To Be Sure

The Auditor's Role company Outsiders Need To Be Sure That The Info

Company outsiders need to be sure that the information they see on financial reports is an accurate reflection of the company's financial situation. This is accomplished by hiring an impartial third party to review the company's operations and financial statements and to confirm that the reports are materially correct and that proper internal controls are being used. This process, known as an audit, is crucial for verifying the accuracy of a company's financial reports.

Every public company that sells stock on public markets must hire an independent certified public accountant (CPA) to audit its financial statements. These audited statements are relied upon by managers, employees, investors, financial institutions, vendors, suppliers, and others who depend on accurate financial information. The CEO and CFO are responsible for approving the financial statements issued to the public, while the auditors provide an independent opinion that these statements are materially accurate.

Auditors must adhere to the rules established by the Public Company Accounting Oversight Board (PCAOB), a private sector nonprofit corporation created by the Sarbanes-Oxley Act to oversee auditors of public companies. Although the PCAOB operates in a private capacity, it functions with government-like regulatory authority, similar to the Financial Accounting Standards Board (FASB), which sets generally accepted accounting principles (GAAP). The PCAOB is considering rules such as mandatory firm rotation—an idea aimed at ensuring auditor independence and improving audit quality.

The Sarbanes-Oxley Act also mandates that public companies with market capitalizations of $75 million or more include an attestation report from their independent auditors regarding the effectiveness of internal controls over financial reporting. This requirement enhances the reliability of financial statements and has influenced the audit process significantly. Research indicates that requiring firms to change auditors regularly can prevent overly close long-term relationships that may threaten independence (McHugh & Polinski, 2012).

Relations between auditors and company management can sometimes develop into personal affiliations that compromise the independence of the audit team. To mitigate this risk, the PCAOB is examining regulations that would require regular change of auditors, including audit firms, to uphold objectivity. Current trends show that fewer auditor changes occur voluntarily, potentially reducing independence; thus, regulatory intervention might be necessary to ensure audit integrity (McHugh, 2012).

Concerns regarding auditor independence have led some to argue that frequent rotation fosters greater objectivity and transparency in financial reporting. While long-term relationships may facilitate familiarity with a company's operations, they can also create familiarity threats that impair judgment. Public trust benefits more from frequent auditor changes, which serve to reinforce auditor independence and rigor (Kachelmeier et al., 2010).

To become a licensed CPA, candidates must meet rigorous educational and professional requirements, including earning a bachelor's degree with an emphasis on accounting, passing the CPA exam, and completing supervised work experience. Maintaining licensure necessitates ongoing continuing education, ensuring that CPAs stay current with accounting standards and regulations. State boards oversee CPAs, and can revoke or suspend licenses for violations, ensuring adherence to ethical standards.

Auditors must approach audits with professional skepticism, challenging management assertions when evidence indicates discrepancies. Although most publicly traded firms rely on the "Big Four" CPA firms—PricewaterhouseCoopers, Deloitte, Ernst & Young, and KPMG—many firms operate with independence as a core value, ensuring objective financial analysis. When disagreements arise between auditors and management regarding accounting treatments or disclosures, auditors are responsible for acting in the public interest, potentially invoking the audit committee or even resigning if necessary.

The audit process involves three key stages: defining scope, performing fieldwork, and reporting findings. Initially, auditors meet with company management and internal committees to establish the scope and objectives of the audit, whether comprehensive or limited to specific areas, such as accounts receivable. Planning includes evaluating internal controls, understanding operational processes, and assessing risks.

During fieldwork, auditors visit various company locations to observe operations, review files, and verify that internal controls are being implemented as intended. For example, they might randomly check refund records to confirm procedural compliance or review loan files to ensure appropriate approvals are in place. The scope of fieldwork varies depending on the company's size and the nature of the audit, encompassing corporate headquarters, regional offices, and operational sites.

As audit work progresses, auditors communicate significant findings with management, offering an opportunity for clarification or correction before finalizing the report. The drafted report summarizes key issues, contains recommendations for improvements, and is circulated among management, the audit committee, and top executives. If disagreements persist, management can submit explanations or objections for inclusion. The final audit report is a vital document describing the audit's findings, which, although not publicly released in detail, influences corporate governance and transparency.

Paper For Above instruction

The role of auditors is fundamental to ensuring transparency, integrity, and trust in the financial reporting process for publicly traded companies. Their independence, adherence to regulatory standards, and professional skepticism help maintain financial market stability and protect stakeholder interests. This paper explores the auditor's responsibilities, regulatory environment, the importance of independence, the process of auditing, and ongoing debates surrounding audit firm rotation.

Auditors serve as impartial third parties tasked with verifying that companies’ financial statements accurately reflect their economic realities. The necessity of an independent audit stems from the need to provide reliable financial information to external stakeholders such as investors, creditors, and regulators. These external parties rely heavily on audited reports to make informed decisions, underscoring the importance of audit integrity (DeFond & Zhang, 2014). The Sarbanes-Oxley Act (2002) significantly enhanced the regulatory framework, emphasizing internal controls and auditor independence, which are central to trustworthy audits (Coates, 2007).

The regulatory oversight by the PCAOB, established under Sarbanes-Oxley, aims to enforce compliance and improve audit quality. Its rulemaking authority includes mandates like mandatory auditor rotation to prevent overly close relationships that could compromise independence. Although some argue that long-term auditor-client relationships foster deeper understanding, critics contend they may create familiarity threats, undermining objectivity (Carcello & Nagy, 2004). Evidence suggests that regular rotation can reinforce independence and provide fresh perspectives, potentially uncovering issues that long-standing auditors might overlook (Kachelmeier et al., 2010).

From a professional perspective, CPAs must meet strict qualifications to ensure competency. These qualifications include comprehensive education, passing rigorous examinations, and gaining practical experience. Continuing professional education helps maintain high standards, enabling auditors to stay current with evolving standards and regulations (AICPA, 2021). Ethical conduct and independence are pillars of the auditing profession, with oversight from state boards designed to protect the public interest. Violations can lead to license suspension or revocation, which underscores the importance of ethical vigilance (Coleman & Bock, 2018).

audited companies must uphold internal controls and transparent reporting. When disagreements occur between auditors and management, the auditor’s duty is to act in the best interest of the public, sometimes requiring resignation if conflicts cannot be resolved. This process is critical for maintaining confidence in financial reporting (Greene et al., 2015). The auditing process itself encompasses scope definition, detailed fieldwork, and reporting. During scope setting, auditors coordinate with management to identify areas of focus, whether broad or targeted. They then perform fieldwork to empirically verify procedures and controls, often through surprise visits and random checks.

The culmination of the audit process is the report, which summarizes findings, highlights internal control deficiencies, and offers recommendations. These reports influence company management and boards of directors, shaping internal improvements and external perceptions. It is vital that auditors maintain independence throughout this process to avoid conflicts of interest that could taint their judgments (Beattie et al., 2014). Regulatory discussions about mandatory firm rotation are ongoing, with the goal of reinforcing auditor independence and safeguarding the integrity of financial reporting.

In conclusion, the auditor's role is integral to the functioning of capital markets and corporate accountability. Their independence, rigorous adherence to standards, and thorough audit procedures help ensure that financial statements are truthful representations of a company's financial health. Ongoing regulatory enhancements, such as mandatory rotation, aim to preserve this independence amid evolving financial reporting landscapes. Ultimately, the goal remains to foster trust among investors, regulators, and the public—foundations essential for the stability and fairness of financial markets.

References

• American Institute of CPAs (AICPA). (2021). CPA licensure requirements. Journal of Accountancy.
• Beattie, V., Fearnley, S., & Stokes, D. (2014). Towards a conceptual framework for audit quality. The British Accounting Review.
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• DeFond, M. L., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics.
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• Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.
• Williams, J. (2019). Regulatory oversight and audit quality. Accounting Horizons.