What is an Independent Auditor?
An independent auditor is a person with an accounting credential who does not have any affiliations with the company upon which he or she offers an opinion. Independent auditors are often used for audits to increase the integrity of the audit by ensuring that conflicts of interest do not taint it. Some accounts make the focus of their careers the provision of auditing services while others may offer an assortment of accounting services including audits. People who need to find an independent auditor can check with a certifying or professional organization for accountants to find listings of practitioners in their area.
When an audit is performed, the goal is an honest examination of financial records, whether the audit is being done to resolve discrepancies, investigate fraud, check for compliance with standard and recognized accounting practices, or for the purpose of determining whether or not the company is reporting financial information accurately on taxes. Companies can request audits themselves and an audit may also be ordered by an external party. While it is possible to use an auditor who is affiliated with the company being audited, an independent auditor is preferred.
The independent auditor must have an accounting certification and is often a Certified Public Accountant (CPA) with experience in the field which makes the accountant competent and capable of offering an opinion. Many independent auditors belong to professional organizations of auditors which promote high standards of performance among their members and provide referrals to members of the public who are in need of an auditor.
Independent auditors have no interest in the outcome of an audit either way. Whether the audit reveals wrongdoing or a clean bill of financial health, the auditor is not personally invested in it because the auditor has no connections with the company. Thus, the auditor can write a clear and unbiased accountant's statement which accompanies the audit results, outlining the findings and discussing their ramifications.
Auditors who are not independent may have conflicts of interest. An auditor might be concerned, for example, about the value of stock, the future direction of the company, or future employment prospects if he or she is connected with the company in some way. While auditors do have very high ethical standards which should allow even an auditor with connections to provide an honest report, conflicts of interest can undermine the authority of the report and are avoided, if possible, by using an independent auditor.
@NathanG - I know what you mean. I’ve read independent auditor report statements from companies that I’ve invested in, and the auditor takes great pains to clarify their opinions in the report.
For example, you see them using statements like “unqualified opinion” (I have no reservations) or “qualified opinion” (I have some reservations) or “going concern” (there is a problem that needs to be addressed).
These weighty expressions give you a clearer idea of the health of the company than a simple stamp of approval. The reality is that with many companies, some things are OK and other things could use improving. The auditor takes all of this into account.
@MrMoody - My brother works as an auditor. He would agree with you one hundred percent. He says that the principle of independence is a crucial one.
If you’re working the financial industry, you have to work within the rules made by the SEC. SEC auditor independence, from what I understand, makes it clear that the auditor must not have a conflict of interest by having any investments, either for himself or family members, in companies he is auditing.
Think about that and you’ll see why it makes sense. All you have to do is give a glowing review of a company’s financial statement, and you can help boost its stock and make extra money.
You could also wind up in jail, too.
@everetra - As far as I’m concerned, an independent auditor is the only real auditor worth listening to. I mean no disrespect to anyone who’s an internal auditor – they have their functions as well, and their opinions should be taken under advisement.
However, I can’t imagine how you can be credible as a business if you only have an internal audit and you don’t at least get a second opinion from someone outside the corporation.
Even if an internal auditor has the best of intentions, he can’t avoid being seen as having a conflict of interest. In my opinion, you should either have only an independent audit, or an internal audit plus an independent audit. An internal audit alone is not enough.
My friend recently graduated with an accounting degree and he is beginning his work as an independent accountant with a focus on auditing.
He tells me that auditors are not only concerned with financial statements but also internal controls, ensuring that there are no internal conflicts of interest in a company. For example, the person who receives the checks from the customer should not be the same person who writes out the checks for the company.
I realize that there may be some overlap of these duties in a small business, but for a corporation he tells me it’s a no-no. It’s a sure prescription for trouble down the road. Auditors, he tells me, not only want to uncover current problems, but prevent future ones.
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