regulator expectations versus client expectations: is there a middle ground?
by alan anderson
transforming audit for the future
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the overarching goal of the audit is to issue the correct audit opinion. but what else do we expect from an audit?
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the word “audit” comes from a latin word that means “to hear.” originally, the official examination of accounts – what we would call an audit – was an oral procedure. and, for many centuries, listening was a primary way of gathering information in an audit. the merriam-webster dictionary defines audit as “a formal examination of an organization’s or individual’s accounts or financial situation” or as “a methodical examination and review.”
but does the perception of audit reflect that definition? if our perceptions define reality, then what is the perception of reality for an audit? everyone has a different view of what the audit should accomplish, and often times those goals are not aligned. this creates marketplace confusion. the unmet “perceived” expectations end up being referred to in the audit profession as the “expectation gap.”
very few companies would get an audit of their financial statements if it were not a requirement from a regulator or another user, such as a bank or an investor. when i speak to groups of cfos and ask if they use gaap financial statements to make business decisions, the resounding answer i almost always receive is, “no.”
audit standards talk about the audit as providing relevant information for users of financial statements. who are those users, and what are their goals?
typically, users of audited financial statements can be categorized as either internal or external. internal users include company management, owners and directors, and employees.
external users can be further divided into three groups:
- regulators, such as the dol, gao, sec, and irs, that are focused on compliance with laws and regulations;
- commercial and investment bankers, insurance companies, leasing companies, vendors, and suppliers that are primarily focused on the company’s collateral and creditworthiness; and
- external shareholders and potential investors that are typically more focused on price per share, dividends, and future cash flows.
while all three groups want assurance that a company will remain a going concern, their different desires may result in opposing pressures on a company.
i’ve always felt that the best counterbalance to make sure companies get their numbers right or at least reasonably correct is the conflict that clients have between the irs and the bank. the irs wants to maximize taxable income to collect more tax. the bank also wants income to support the loan payments. the client doesn’t want to pay more taxes than they have to. if they overstate their income, they pay more taxes. but if they understate their income, the bank might call the loan.
what do the regulators want? mainly, they want to be sure that organizations are complying with the relevant laws and regulations. the irs wants to be sure that what was reported to banks and investors is consistent with tax returns. the dol wants assurance that companies are safeguarding their employees’ retirement accounts. the sec wants to protect investors and make sure the capital markets work.