Transcript

Slide 2: One independent monitor is the auditor. Auditors check to make sure that the accounting system and associated internal control structure is operating as designed. This is important in determining that the financial statements prepared from the information in the system is fairly presenting the financial performance of the company

There are two types of auditors
Internal auditors
External auditors

Slide 3: Internal auditors are a semi-independent group within the organization who:
Monitor operating results and financial information
Evaluate internal controls – the key word here is evaluate…they do not design nor do they implement internal controls. They may be consulted in the design of the internal controls…but the ultimate design decision rests with management
assist with increasing efficiency and effectiveness of operations

Slide 4: External auditors are totally independent of the organization. They are certified public accountants who are hired or retained by the organization to perform audits on the financial statements. The main job of the external auditors is to determine if the statements have been prepared according to generally accepted accounting principles (GAAP) and provide REASONABLE ASSURANCE that the statements are presented fairly with no significant fraud or misstatement. In the course of their work they also review the internal controls to be sure that they are functioning and thus assuring themselves that the resulting financial information can be relied upon.

Slide 5: Both internal and external auditors use several different procedures during the course of the audit.
There are interviews of key personnel
observation of processes
sampling of transactions to make sure they meet a list of required characteristics
external confirmation of various transactions and accounts
and finally analytical procedures like ratio analysis

Slide 6: Prior to the collapse of Enron and Worldcom from their fraudulent mismanagement there was a growing consensus in the business world that the independence of auditors was weak. In particular, Arthur Levitt during and after his tenure as chairman of the SEC was highly critical of auditing firms providing lucrative non-audit services to their audit clients. Levitt felt that these services were a conflict of interest. That auditing firms might be swayed by the big dollar non-audit services to look the other way during an audit when material facts presented themselves in regards to the financial statements. His position was not a popular one and he garnered considerable criticism from the accounting profession. In the end, Levitt was forced to retreat as big business lobbied congress to get him to back down from his position.

Slide 7: The other monitoring body I want to discuss is the Securities and Exchange Commission or SEC. We discussed them earlier in the class but I want to bring them back to your attention. First they are a government body that is responsible for the regulating the financial reporting practices of publicly traded companies. What do I mean by publicly traded companies? Publicly traded means that the company stock sells on one of the stock exchanges like the New York Stock Exchange or NASDAQ.

Slide 8: The SEC was created by Congress in response to the great stock market crash in 1929.
As you will see when we get to the next module on Sarbanes Oxley, Congress responds to these catastrophic economic events by enacting laws. So in response to the 1929 crash they created the SEC with the Securities Act of 1933. They later followed this act with the 1934 Securities Exchange Act.

When Congress created the SEC they gave it authority over accounting standards. The SEC then turned that authority over to the accounting profession to design and implement accounting standards with the caveat that if they failed the SEC would rescind that authority and take it upon themselves to provide the accounting standards.