The importance of audits


Special to the Recorder

Private company financial statement audits provide assurance to lenders, investors or any other stakeholder, that the financial statements of the company are reasonably accurate and that the methods used to account for the company’s assets, liabilities and financial results are consistent with the methods used by all other private companies in the United States of America. That’s a mouthful – but absolutely crucial to maintaining order in our capitalistic economy.

Before going on about what an audit is, it is important to know what an audit is not. An audit does not guarantee that any and all fraud or errors will be caught. If management is intent on hiding things from an auditor, they may be successful in doing so. An audit also is not an evaluation of the company’s management, nor is it intended to tell the reader what the company will do in the future or what management intends to do in the future.

What an audit does provide is a set of financial statements that present factual historical results of a company’s performance and current financial position. An audited set of financial statements tells the financial story of where the company has been and how it got there.

An audit is an independent evaluation of the company’s financial results, which is essential for a stakeholder to know that the audit, and financial reporting, is not somehow influenced by anyone at the company. An auditor’s independence could be affected by a relationship with the company, such as a family member who works for the company, an investment by the auditing firm in the company, or making certain financial management decisions (making monthly ledger entries) for the company during the year.

An audit also assures that the financial statements are fairly stated in all material respects. The concept of materiality is necessary because an audit cannot provide absolute assurance that the financial reporting does not contain some small errors. Clearly the cost of performing such a test of the accounting records would require many hours and would not be affordable; instead, the audit relies on statistical testing of a sample of transactions which provides statistical assurance of accuracy.

Finally, and perhaps most helpfully, an audit forces a company to put in place accounting processes and financial controls around cash and other company assets as well as controls over proper reporting of revenue and the obligations of the company. The audit process evaluates these financial controls and therefore management’s execution of its financial stewardship of the company’s assets. The auditor’s written evaluation of controls is presented to those in charge of the financial governance of the company, such as a board of directors or an executive officer of the company, and provides a great deal of value to a smaller growing company.

Scott Heller is a partner at Pivot CPAs in Ponte Vedra Beach