Have you ever wondered what an independent auditor can do to help you run your enterprise more efficiently and effectively? Beyond the report the auditor issues on your financial statements, that is. For a clear picture of the auditor’s role, perhaps it is best to understand what independent auditors cannot do according to the rules […]
Have you ever wondered what an independent auditor can do to help you run your enterprise more efficiently and effectively? Beyond the report the auditor issues on your financial statements, that is.
For a clear picture of the auditor’s role, perhaps it is best to understand what independent auditors cannot do according to the rules by which they are bound. First, a bit of history. “Back in the day,” companies often relied upon accountants from their audit firm to assist in reconciling accounts, preparing adjusting journal entries, and writing financial statements. Small businesses in particular often lacked the level of accounting sophistication necessary to carry out these tasks. This decision often made sense from the perspective of efficiency and cost containment.
Enter a re-doubled focus on auditor independence as highlighted in Interpretation 101-3, and a host of related authoritative regulatory guidance issued by the U.S. Securities & Exchange Commission, the General Accounting Office, state boards of accountancy, the American Institute of Certified Public Accountants, and the U.S. Department of Labor. The new and improved standards generally restrict the non-attest services that auditors may perform, and the circumstances under which such services may be allowed.
The aforementioned regulations served to seemingly muddy an already oft-misunderstood set of expectations. This leaves the question: What is it that auditors do not do?
First and foremost, auditors do not take responsibility for the financial statements upon which they form an opinion. The responsibility for financial-statement presentation lies squarely in the hands of the company being audited. Auditors are not a part of management, which means the auditor may not:
- Authorize, execute, or consummate transactions on behalf of a client
- Prepare or make changes to source documents
- Assume custody of client assets, including maintenance of bank accounts
- Supervise client employees performing normal recurring activities
- Report to the board of directors on behalf of management or
- Serve as a client’s stock or escrow agent or general counsel
Further, an auditor may not:
- Sign payroll tax returns on behalf of a client
- Approve vendor invoices for payment
- Design a client’s financial-management system or make modifications to source code underlying said system
- Hire or terminate employees
In short, the auditor may not assume the role of management. In practical terms, there are a number of tasks you should not expect your auditor to perform. A company also should not expect the independent auditor to:
- Analyze or reconcile accounts
- “Close the books”
- Locate invoices, etc. for testing
- Prepare confirmations for mailing
- Select accounting policies or procedures
- Prepare financial statements or footnote disclosures
- Determine estimates included in financial statements
- Determine restrictions of assets
- Establish value of assets and liabilities
- Maintain client permanent records including loan documents, leases, contracts, or other legal documents
- Prepare or maintain minutes of board of director meetings
- Establish account coding or classifications
- Determine retirement-plan contributions
- Implement corrective action plans
- Prepare the entity for audit
Remember, a company’s independent auditor examines the company’s financial statements and provides a written report containing an opinion as to whether the financial statements are fairly stated and comply in all material respects with Generally Accepted Accounting Principles (or some other basis of reporting, but that is a topic for another day). Management is responsible for all the rest.
Perhaps your organization does not require an audit and instead engages a certified public accountant (CPA) of a different type of service. You should be aware that independence concerns exist beyond the audit realm.
While auditors are not responsible for writing pronouncements or regulations, they can help you navigate the confusing landscape. The best time to understand the circumstances under which your CPA can offer particular services is before the service begins. Be sure to open the dialogue with your independent auditor today.
Gail Kinsella is a partner in the accounting firm of Testone, Marshall & Discenza, LLP. Contact Kinsella at gkinsella@tmdcpas.com