Audits play a pivotal role in corporate governance, compliance, and finance. They are crucial tools to assure transparency, accountability, and trust in the public markets — and for publicly traded companies, the stakes are even higher. They are required to undergo annual audits of their financial statements and internal control, an exacting process that imposes a host of duties on the company in question.
This article unpacks the regulatory landscape surrounding public companies and their audit requirements. We’ll explore why audits are not just a legal formality but a fundamental aspect of corporate integrity and investor confidence. Whether you’re an investor, a corporate professional, or simply someone interested in the intricacies of corporate governance, this post will shed light on the importance of auditing in public companies and the effect audits have on the broader financial ecosystem.
Which type of companies are required to have an audit?
In the United States, publicly traded companies have had to undergo annual independent audits for decades. They aren’t the only organizations, however, who either need annual audits or can benefit from undertaking them.
Publicly listed companies. Publicly traded companies are required by law in the United States and most other jurisdictions to undergo annual financial audits. This requirement is enforced to protect shareholders and the public, who rely on accurate financial information to make informed decisions.
Large private companies. While rules vary by country, large private companies, usually defined by a combination of their revenue, assets, and number of employees, often need to conduct annual audits. These audits provide assurance to investors, creditors, and other stakeholders about the accuracy of the company’s financial statements.
Nonprofit organizations. Many nonprofit organizations, especially those that receive a significant amount of public or government funding, are required to have annual audits. These audits are crucial for maintaining transparency and public trust in how these organizations utilize their funds.
Companies seeking investment. Startups and companies seeking investment from venture capitalists, banks, or other financial institutions may be required to undergo an audit to receive those investment dollars. Auditors verify the financial health and viability of the company, which is vital information for potential investors.
Companies with external debt. Companies that have taken on significant external debt may be required by their lenders to conduct regular audits. These audits assure lenders that the company is in a stable financial position to repay its debts.
Subsidiaries of public companies. Even if a subsidiary company is not publicly traded, if its parent company is, that subsidiary may still be required to undergo an audit. This assures the parent company’s consolidated financial statements, which include the subsidiary’s financials, are accurate.
Companies with shareholder agreements requiring audits. Some companies have shareholder agreements that mandate annual audits. These agreements are often put in place to provide shareholders with confidence in the financial statements and operations of the company.
Government contractors. Firms that contract with government agencies are often required to have regular audits. These audits ensure that taxpayer funds are being used appropriately and following the terms of the contract.
How often are publicly traded companies audited?
By law, the annual financial statements of public companies must be audited each year by independent auditors. These auditors are certified public accountants (CPAs) who examine the statements for conformity with U.S. Generally Accepted Accounting Principles (GAAP).
A company’s management prepares the financial statements to inform investors and the public about the company’s financial position and the results of operations. The audit committee of the company’s board of directors then hires an independent auditing firm to examine the statements and other related disclosures. The audit committee oversees the auditors’ work and also monitors any disagreements between the auditors and company management regarding financial reporting.
The auditing team consists of accountants and other professionals under the leadership of senior CPAs who work at an accounting firm. Audit team members are chosen based on how their individual skills match the particular requirements of the company needing the audit.
All CPA firms must be registered with the Public Company Accounting Oversight Board (PCAOB). Large companies typically work with one of the “Big 4” audit firms: PwC, Deloitte, KPMG, or Ernst & Young. Smaller companies are more likely to work with smaller audit firms.
How does the audit happen?
The auditors examine a company’s accounting books, transaction records, and other relevant documents to determine whether the company has presented its financial statements fairly and those statements don’t contain any material misstatements.
The auditors then prepare a written audit report containing an opinion on the company’s financial statements, and file it with the U.S. Securities and Exchange Commission (SEC). The audit report that’s on file with the SEC is available to investors and other interested parties. (Other organizations, such as nonprofits, might have their financial statements and audits filed with other agencies, such as a state attorney general or secretary of state.)
The main goal of the audit report is to give capital market participants, investors, and policymakers “reasonable assurance” — that is, assurance beyond the company’s own declarations — that they can rely on the financial statements for investment decisions and other purposes.
Auditors also often evaluate the effectiveness of an organization’s internal controls over financial reporting (ICFR). Internal controls are procedures created by management to address the risk of misstatements and material errors in financial statements. Auditors can increase the confidence of investors by attesting that an organization’s internal controls are effective.
The audit requirements for private companies are different from those for public companies. Both public and private companies are subject to generally accepted accounting principles, although for different reasons.
The SEC requires publicly traded companies to provide GAAP-compliant audited financial statements. Private companies may be subject to GAAP requirements to satisfy lenders, insurance companies, or certain classes of shareholders, but many private companies don’t issue audited financial statements. The main concern of private organizations is reducing taxes; consequently they often only prepare tax returns and statements that aren’t audited.
Choosing an independent auditor for your business
The choice of an auditor is a significant decision that can affect not just the financial transparency of a business but also its reputation and compliance with regulatory standards. Here are key considerations for businesses when selecting an independent auditor.
Reputation and credibility. Look for an auditing firm with a strong reputation for integrity and quality services. Check the firm’s track record, client reviews, and any industry recognitions or awards they might have received. A reputable auditor is likely to be more reliable and trustworthy.
Industry expertise. Choose an auditor with experience and expertise in your industry. Different industries have different accounting issues and regulatory requirements. An auditor familiar with your industry will be more adept at identifying potential issues and providing relevant insights.
Size and resources of the firm. Consider the size of the auditing firm and its resources. Larger firms may have more extensive resources and a wider range of expertise, but smaller firms could offer more personalized attention. Assess your company’s needs and choose a firm whose size aligns with those needs.
Audit team experience and qualifications. Evaluate the qualifications and experience of the specific audit team members who will be working with your company. Confirm that they have the necessary certifications (such as being CPAs), and relevant experience.
Communication and approachability. Good communication is crucial. The auditor should be approachable and willing to explain their findings in a clear, understandable manner. Regular communication and a transparent approach can greatly facilitate the audit process.
Independence and objectivity. Verify the auditor’s independence. They should have no financial or other relationships with your company that could impair their objectivity. Independence is critical for an unbiased audit.
Scope and methodology of the audit. Discuss the scope and methodology of the audit. Understand what areas of your financial statements will be examined and how the audit team will conduct its work. This will help you prepare for the audit and set appropriate expectations.
Cost of the audit. While cost should not be the only factor, it’s important to consider the fees charged by the auditor. Be sure the fees are reasonable and align with the market rate for similar audit services.
References and client feedback. Ask for references and feedback from other clients who have used the auditor’s services. Client experiences can provide valuable insights into the auditor’s working style and the quality of their services.
Regulatory compliance. Verify that the auditor is licensed and in good standing with regulatory bodies. This assures that the firm adheres to the highest standards of the auditing profession.
By carefully considering these factors, businesses can choose an independent auditor that not only meets your auditing needs, but also adds value through their expertise and insights. Remember, the right auditor is a partner to assure the financial health and regulatory compliance of your business.
Prepare for your next audit with reporting from ZenGRC
Preparing for an audit is no easy thing. ZenGRC’s comprehensive reporting tools can help you navigate that process more easily and efficiently.
ZenGRC offers a centralized platform that simplifies the gathering and organizing of the necessary documentation, smoothing the path to comply with auditing standards. Its intuitive dashboards provide real-time insights into your compliance status, helping you identify and address any gaps before the audit.
With customizable reporting features, ZenGRC allows you to generate precise, detailed reports tailored to the specific requirements of your auditors. By leveraging ZenGRC’s capabilities, you can approach your next audit with confidence, backed by a robust, well-documented compliance framework.
This makes ZenGRC an ideal choice for organizations looking to enhance their compliance posture with minimal hassle and maximum confidence.
Schedule a demo today to see how ZenGRC can help you achieve “Zen-mode” compliance!