4.19.2006

Public Service Announcement

Over the past several months, I've begun to realize how great the gap is between the general public's expectations of independent auditors and what auditors are actually required to do. I thought I'd take this opportunity to clear up some things, before I grow up to be an accountant and get sued because of the ignorance of a member of the aforementioned general public.

Generally, those without an accounting or legal education seem to expect that the auditors of a particular company's books will find any incident of fraud or error that has occurred during the year. But guess what? That doesn't always happen. It's not even an auditor's job to provide assurance that financial statements are 100% accurate.

So what is an auditor's job? Here is a link to auditing standards. Click on "AU 110," which contains information on "Responsibilities and Functions of the Independent Auditor." This document reads, in part,

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements are detected.

Basically, the auditor cannot and does not guarantee that financial statements are completely accurate. He cannot always detect every incident of fraud. But that isn't his job description anyway. His job is to obtain reasonable assurance that the financial statements are free from material misstatement.

1 comment:

Becca said...

Yuck. I thought words like "material" and "reasonable" were nebulous visions seen only in law. But then, if the auditor is getting sued for breach of duty, I guess it is "in law," huh?