GLOSSARY

People usually have mixed feelings about audits and auditors. In the process of establishing whether the information in a company’s financial statements is true and in compliance with the GAAP (Generally Accepted Accounting Principles), auditors are bound to make a thorough investigation of all account entries to ensure that they match the original sales and purchase invoices and other documents. This means that an auditor’s job description includes being suspicious and asking a lot of annoying questions. Therefore it is no wonder that they do not usually win popularity contests and their role seems to be to disclose facts someone has deliberately hidden or misrepresented to achieve financial benefits.

If an auditor’s report states that financial statements are free of material misstatements, the company can breathe a sigh of relief, because that means that there is no false or missing information, caused by fraud (deliberate action) or error. The word ‘material’ implies having a significant influence on stakeholders’ decisions. On the other hand, the more cynical among us could describe the work performed by auditors in a joke which says that 2+2 to an auditor equals whatever the company that engaged them would like it to be. According to such dim views, accountants have changed from watchdogs into salespeople.

Independence is a prerequisite of proper auditing. However, companies often engage in practices known as opinion shopping, i.e. looking for auditing companies that will grant them favourable opinions known as unqualified opinions. Since auditors are paid by companies and need future engagements, it is only understandable that they will be reluctant to issue unfavourable opinions. It comes as no surprise that in a study carried out a couple of years ago nearly half of the companies which later faced bankruptcy did not reveal ‘a going concern disclosure’ in previous auditor’s reports. This paragraph would have warned all interested parties that the company was facing serious financial difficulties.

In real life, it could be argued that auditors are sometimes hired on the basis of their creativity when it comes to cooking the books, or managing earnings, as they sometimes call it. It is simply a way of making things look better than they are to keep stakeholders happy and attract investors. Auditors engaged in such practices can pacify their professional guilty consciences by stating that by making revenues appear larger than they actually are, a struggling company could stay afloat with investors’ money until it can turn a true profit.

Benefits that can be obtained from a properly conducted audit are numerous. Among others, it is a firm assurance for a company’s management and all its stakeholders that its financial statements are trustworthy for making important decisions. Every home should appreciate the presence of a fair and reliable watchdog who will demonstrate his loyalty by keeping a sharp eye on possible wrongdoings rather than cover them up.