What Is an External Auditor? (And When Do Boards Need One?)

Close-up Of Businessman Checking Invoice With Calculator At Desk

When it comes to reviewing a company’s financial status, every organization needs a good auditor. Auditors cull through in-depth accounting information in order to ensure that the reporting is a true representation of the company’s financial position. Auditors also assess things such as risk in order to help guide organizations to a healthier and more prosperous financial future.

Internal audits happen frequently within an organization. Companies utilize their own hired talent to review the work of others or the overall validity of the company’s financial reporting. As the Association of Certified Fraud Examiners explains it, “The internal audit function helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. The scope of internal auditing is broad and may involve the efficiency of operations, IT controls, the reliability of financial reporting, deterring and detecting fraud, and compliance with laws and regulations.”

For most small to medium-sized companies, an internal audit is the only kind of financial assessment that is necessary on a regular basis unless problematic issues arise—although some business leaders advocate for the benefits of an external audit for small, family-owned companies, too. For larger companies (particularly public companies), external auditing is an additional must and required by law. In the case of the United States, external audit requirements were set forth by the Sarbanes-Oxley Act of 2002. Under these requirements, an external auditor must be deemed sufficiently “independent” from the company that hires them to carry out an audit. Not only can the external auditor not be currently employed by the company, they also cannot have conflicting interests or close relationships with individuals that might influence their findings or shift their neutrality.

Specifically, the U.S. Securities and Exchange Commission’s website, “The audit committee should consider whether a relationship with or service provided by an auditor:

(a) creates a mutual or conflicting interest with their audit client;
(b) places them in the position of auditing their own work;
(c) results in their acting as management or an employee of the audit client; or
(d) places them in a position of being an advocate for the audit client.”

According to the Association of Certified Fraud Examiners, the role of the external auditor is, “To inspect clients’ accounting records and express an opinion as to whether financial statements are presented fairly in accordance with the applicable accounting standards of the entity…They must assert whether financial statements are free of material misstatement, whether due to error or fraud.” In other words, these individuals check up on the work of the internal auditors to make sure that they haven’t overlooked any mistakes or purposefully “cooked the books.”

External audits provide boards with valuable information in regard to their company’s financial condition. They also help board members spot potential internal oversight or unethical behavior. Large companies (even those that haven’t gone public) should utilize the external audit process as a means to better their organization and thoroughly investigate its current standing.

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