What is an Independent Auditor
An independent auditor is a certified public accountant (CPA) or chartered accountant (CA) who examines the financial records and business transactions of a company with which he is not affiliated. An independent auditor is typically used to avoid conflicts of interest and to ensure the integrity of performing an audit.
Independent auditors are often used – or even mandated – to protect shareholders and potential investors from the occasional fraudulent or unrepresentative financial claims made by public companies, such as following the implosion of the dotcom bubble and the passage of the Sarbanes-Oxley Act (SOX) in 2002.
BREAKING DOWN Independent Auditor
An independent auditor either works for a public accounting firm or is self-employed. The auditor examines financial statements and related data, analyzes business operations and processes, and provides recommendations on achieving greater efficiency. He evaluates company assets for impairment and proper valuation and determines tax liability, ensuring compliance with tax code and laws.
The auditor develops an opinion asserting the reliability and fairness of clients' financial statements, then communicates the information to investors, creditors and government organizations. In addition, he may perform other auditing, tax and consulting services for individuals, corporations, nonprofit organizations or government entities.
An independent auditor asks questions of management and staff for a better understanding of the business, its operations, financial reporting, internal control system, and known fraud or error. He may perform analytical procedures on expected and unexpected variances in account balances or transaction classes, then test documentation supporting those variances. The auditor also observes the company’s physical inventory count and confirms accounts receivable (AR) and other third-party accounts.
The Sarbanes-Oxley Act of 2002 (SOX) was passed after Enron, WorldCom and several other technology companies collapsed due to accounting improprieties. The goal of SOX was to improve corporate governance and restoring the faith of companies' investors. However, many in the business world are against SOX, seeing it as a politically motivated move leading to a loss of risk-taking and competitiveness.
Of concern to many is the mandate requiring that public companies obtain an independent audit of their internal control practices. The cost of the requirement is felt most acutely by companies with market caps of $75 million or greater. The audit standards were also modified in 2007, reducing costs for many firms by 25 percent or more annually. In addition, despite high initial costs of the internal control mandate, markets use the information to assess businesses more effectively, managers continue improving internal processes, and the internal control testing becomes more cost-effective over time.