Investors need audits for much the same reason couch potatoes need
E! Entertainment Television. They can't get behind the scenes without them.
"As the public, you do not have the right to get behind the financial picture that management is painting for you," says Arleen Thomas, the
American Institute of Certified Public Accountants
vice president of professional standards and services. Investors just do not have access to the detail that makes up the numbers in a company's financial statements.
Sure, company's financial documents can be downloaded from
freeedgar.com and financial newspapers and Web sites offer in-depth company analyses. But aside from some limited access to industry analyst reports, any investor's well-intended financial investigation will come to a screeching halt.
The auditors on the other hand have access to anything that relates to the numbers on the financial statements.
They can demand a year's worth of a company's sales invoices and total them up to make sure that the company's revenue number is accurate. They can get access to canceled checks, payroll records, pension plan information and loan documents from debtors.
Even the company's board of directors does not have this kind of access. "We can't get to the books," says Samuel Hayes, a finance professor at the Harvard Business School and a director on several different company boards. "A director could never ferret out what the auditors are paid to do."
Auditors are supposed to be independent third parties. They review the financial statements with objective eye to protect shareholders from a company's shenanigans.
Sure, everyone wonders where the auditors were during the
debacles. Experts and money managers, however, agree that the system isn't foolproof.
Of the annual audits performed on the approximately 16,000
registered companies, 99.8% have no problems, says Thomas. "Hopefully that knowledge helps you weather the storm of the Cendants."
Auditors ensure that the assets -- the things the company owns, such as buildings, raw materials or cash -- and the liabilities -- the bills the company owes -- actually exist and are reported at their correct valuations. Auditors test to prove that any revenue, a.k.a. sales, that the company reports was actually earned, not manufactured. And finally they make sure that the numbers are presented in line with the Generally Accepted Accounting Principles, the rules the bean counters created to keep financial statements uniform.
Aside from shareholder protection, the SEC mandates that all public companies be audited. Companies can't file a 10K or 10Q, have an initial public offering or borrow money from a bank without an auditor's opinion on their financial statements, says Mike Young,
Willkie Farr & Gallagher
securities law and financial reporting partner and author of
Accounting Irregularities and Financial Fraud.
While the language in the auditor's opinion in a financial statement may be hard to understand, its mere appearance often serves as a seal of approval to investors.
Whether a consulting relationship undermines that is what the SEC is trying to find out.
Be sure to see
Independence Day Looms in SEC-Accounting Firm Battle.
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