Why Financial Auditing Can Determine A Company's Future

Financial auditing is a method by which an organization employs another organization, usually an accounting firm, to thoroughly examine the internal financial affairs of that organization. In many cases, this audit is not required by law, but is an asset to the company which has ordered it. This is usually because that company is seeking to raise finance, either from banks or from share issues. The way these audits are carried out depends to a large degree on the nature of the organization being audited. Companies of any type and size can be audited, as can governments and government departments.

There have been audits of some kind carried out for centuries, ever since the fourteenth century. In the early times, an audit was simply something which could be shown to interested parties to reassure them that everything was in order. The audit still satisfies that function today, although it has become a lot more complex. Audits have been common since the start of the Industrial Revolution, when the numbers of businesses started to increase dramatically. This was the point at which investor money suddenly had far more choices available to it, and therefore companies wanted to present themselves in the best possible light.

The desperate need for companies to compete for available investor money has brought with it the inevitable side effect, which is companies covering up their own inadequacies using creative accounting methods. Some of these methods are blatantly illegal and have had extremely serious consequences. Never was this more clearly displayed than in the recent Enron scandal, which resulted in a major company suing for bankruptcy, and the disqualification of the accounting firm which audited them.

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This incident has only confirmed the pressure which auditing firms are under. All financial audits are carried out in an environment where creative accounting and the hiding of pertinent information are perfectly possible, yet the penalty for not discovering these anomalies can effectively be the destruction of the accounting business and the loss of hundreds of jobs. Auditing firms operate under huge pressure every day, yet they are funded by the very businesses which can be hiding information from them.

Financial auditing will only achieve the high degree of accuracy it needs if the penalties are kept at these extreme levels, because there is always the possibility of collusion. As it is, it is extremely hard for a company to pass an audit without having the genuine infrastructure in place to warrant it. The fact that auditing is so exact and cases such as Enron are so rare means that investors have confidence in the results of audits. A large corporate investor, which can choose virtually any investment for its funds, can easily be swayed by the results of financial auditing.

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