What is 'Auditability'

Auditability is the ability of an auditor to achieve accurate results in the examination of a company's financial reporting. Auditability is dependent upon the company's financial recording practices, the transparency of its operational reporting and the forthrightness of company managers in interacting with and providing their auditors with required information.

BREAKING DOWN 'Auditability'

An audit is most effective when auditors are given access to a company’s correct and complete financial information in a timely manner. This allows auditors to do a more thorough and accurate assessment of the company's financials. The areas covered in the scope of an audit include assessing quality controls and risk management. A management team’s inability or unwillingness to provide auditors with the information they need in relation to these two areas are potential reasons for an auditor’s decision to issue a qualified rather than a clean audit opinion on a company’s financial statements and determine a company’s records are unauditable and terminate its relationship. Other important factors that effect auditability include insufficient company records, whether or not financial statements have been presented in compliance with Generally Accepted Accounting Principles (GAAP) and cases of suspected or detected fraud. Another factor that can influence auditability is whether the auditor is sufficiently independent of the entity being audited.

One example of unauditability is described in a January 12, 2017, Government Accountability Office (GAO) report on the federal government. According to the report, the GAO, whose mission is to investigate federal spending and reporting for the U.S. Congress, was unable to complete its audit of the federal government because “we were unable to obtain sufficient appropriate evidence to provide a basis for audit opinions on the consolidated financial statements.”

While the U.S. government’s reputation and its desirability to investors do not appear to be affected by its unauditability, companies in similar positions can see their stock prices plummet and face negative reactions from their investor base and face probes from regulations.

Auditors and Accountability

Questions regarding audit quality have also brought attention and extra scrutiny to auditors themselves. The major global accounting firms including KPMG, Arthur Andersen and Ernst & Young have come under repeated fire from the Public Company Accounting Oversight Board (PCAOB), which Congress established to oversee the audit process for public companies, for not discovering major frauds, such as those that took place at Enron and WorldCom, that should have made those companies unauditable, instead producing clean opinions in their audit reports.

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