Independent audits are external reviews of a company’s financial information, conducted by public accounting firms or private certified accountants. There are two types of audits: internal and external. The development of independent audits came about after major accounting scandals. The Sarbanes-Oxley Act of 2002 limited the amount of accounting functions a public accounting firm could offer a corporate client. Companies that follow International Financial Reporting Standards may be subject to independent audits. Changes to traditional audit services have increased business costs for companies.
An independent audit is an external accounting function conducted by a public accounting firm or a private certified accountant (CPA). Audits are generally an objective review of a company’s financial information. Two types of audits can be used in the corporate environment: internal and external. Internal audits are usually conducted by company employees for management review purposes. External audits are usually independent audits conducted by parties outside the company to provide an objective opinion on the company’s financial accounting process. The development of the independent audit process came about after the discovery of major accounting scandals in the corporate environment.
Independent audits can be conducted by various organizations. Government entities may conduct independent audits of other government entities or private companies. These audits ensure that organizations follow specific regulations or laws imposed on their business operations. Independent audits have also gained importance after significant financial situations arise in the business sector. Examples of these situations are the Great Depression, or more recently, the major accounting scandals of the early 2000s.
In 2001-2002, major companies such as Enron, WorldCom and Sunbeam were found to have manipulated significant portions of their financial information. In Enron’s case, the company’s accountant and auditor, Arthur Andersen, was determined to have inappropriate dealings with Enron. Arthur Andersen provided Enron with general accounting, consulting and auditing services for its accounting functions. Federal regulators determined that Arthur Andersen was unable to provide an independent audit opinion for external stakeholders’ use of Enron’s financial information due to the close professional relationship and multiple accounting services completed by Arthur Anderson.
In the United States, the Sarbanes-Oxley Act of 2002 limited the amount of accounting functions a public accounting firm could offer a corporate client. A significant change of this Congressional legislation was that corporations could not use the same public accountant for general ledger services and independent audit opinion issued to investors. While public audit firms may offer internal audit services for management review, official audit opinions issued for external purposes are not permitted.
Companies that follow International Financial Reporting Standards (IFRS) may be subject to independent audits based on the application of these accounting standards to foreign entities. Independent audits performed on foreign companies may also follow audit guidelines prepared by the International Auditing Practices Committee (IAPC). Rising international auditing standards and increasing auditing regulations in the United States have significantly changed the accounting and auditing profession.
Changes to traditional audit services in the accounting industry have increased business costs for companies operating in the business environment. Businesses may now be required to use multiple accounting firms depending on the type of service the business requires. Failure to maintain an independent relationship with external auditors can result in severe financial penalties for the firm and the revocation of the audit firm’s ability to audit public companies.
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