Public companies have legal requirements to perform an annual audit and disclose certain types of financial information. Most organizations have to do an annual audit. Audits give the public assurance that a company’s financial statements are accurate and that they can abide by them. An independent auditor gives a company’s financial records an additional set of eyes and holds companies accountable for accuracy.
The board of directors should understand what independent auditors do and weigh the pros and cons of hiring one before making a decision on how to handle their next audit.
What Is the Role of an Independent Auditor?
An independent auditor is a certified public accountant who examines the financial statements prepared by the management of an organization. Public companies are required to file annual financial reports with the Securities and Exchange Commission (SEC). The reports must be accurate, complete and honest. The financial records must be documented according to Generally Accepted Accounting Principles (GAAP).
The documents that public companies must provide include the company’s annual report and other reports for shareholders related to the solicitation of proxies for the company’s annual general meeting.
The SEC requires companies to hire independent auditors to examine these financial statements and create a report of their findings. Independent auditors provide an opinion on whether the financial statements are fairly stated and whether they comply materially with GAAP.
As part of the annual audit process, independent auditors review the company’s financial reporting process and investigate their internal accounting controls to ensure that the company has designed its system appropriately and that it’s operating effectively.
During the audit process, independent auditors need access to the company’s books and records, through which they will strive to get an understanding of the company’s internal controls. The audit process requires them to observe, inquire and affirm their understanding of how the company does things. The procedures that the auditor uses must be thorough enough so that they can get enough information to form an opinion on whether the financial statements are fair and conform to GAAP standards.
What happens if the independent auditor can’t come to the conclusion that he or she can affirm the fairness and compliance of the financial statements? The auditor then has the option of asking the company to change the financial statements or refuse to issue a standard audit report.
Pros and Cons of Hiring an Independent Auditor
For companies that have the option of hiring an independent auditor or handling the functions in-house, board directors should be aware of the pros and cons of hiring an independent auditor.
Pros of Hiring an Independent Auditor
At home and in business, there are many jobs that you can easily do yourself. When you don’t have the proper time to do a good job or you don’t feel capable of taking care of a task, that’s the time to outsource the job to a professional.
When you hire an independent auditor, you can count on getting an in-depth analysis of your company’s accounting processes and operations. The audit will also provide assurance for the board, managers, shareholders and stakeholders that the company is in legal compliance with accounting standards. An independent auditor provides an objective perspective of errors that may affect the quality of the financial reports. The hiring of an independent auditor gives board directors peace of mind in knowing that all accounting processes are as correct as they can possibly be.
Companies that perform their annual audit internally are at the mercy of establishing their own benchmarks. Independent auditors may be able to create new reference points and standards after getting acquainted with the company’s accounting processes. An experienced independent auditor will be able to modify existing benchmarks to improve the company’s performance.
Independent auditors are professionals who work at their craft every day. There are no shortcuts to accounting procedures. Independent auditors have the necessary expertise and experience to detect issues and apply solutions with which internal auditors or other employees may not be familiar. Independent auditors are highly knowledgeable and can share that knowledge with your staff.
Most of all, when you hire an independent auditor, you’re getting an unbiased report that includes new ideas and proposals for producing the best performance.
Cons of Hiring an Independent Auditor
There’s no way around it, hiring an independent auditor is costly, perhaps too costly for most small companies. Hiring an independent auditor requires an initial expense, and it can also be expensive to maintain the relationship.
While part of the internal auditor’s job is to get an understanding of the company’s accounting practices and internal controls, it may be challenging for them to get a complete picture of the finance department in the amount of time they have. There’s always a chance that an independent auditor will miss something and not provide the most accurate audit report possible.
Much of the information that independent auditors review is highly confidential. There is a risk of sharing information that could leak outside the company and cause harm.
Independent auditors are used to working with companies that regularly handle large transactions. This isn’t a benefit for smaller companies that regularly have smaller transactions.
The quality of the independent auditor’s work may depend on the quality of the financial reports that they get from management. If they get poor-quality reports and they’re not able to get cooperation from management, it could affect the results of the audit and the final recommendations and opinion.
How Your Board Can Better Prepare For An Audit
The modern governance solution to proceeding with an independent audit is to use a board management software program from Diligent Corporation. Diligent Boards and the suite of software solutions that comprise Governance Cloud make it possible for audit committees and independent auditors to share files and documents securely to preserve the integrity of the annual audit process. The company has full control over who has authorized access to financial reports and files. A board management software solution by Diligent Corporation is a company’s best tool for ensuring that their annual audit is as compliant, accurate and transparent as it needs to be.