Auditability

Key Takeaways

• Auditability relies on accurate, transparent financial reporting and cooperation from company managers.
• Auditors need timely access to all necessary information required to conduct a thorough audit.
• Lenders and investors often require external audits to ensure financial transparency.
• Major auditing firms have been criticized for not identifying fraud in high-profile cases.
• Cooperation with auditors can prevent legal actions and maintain favorable borrowing conditions.
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What Is Auditability?

Auditability is defined as the ability of an auditor to get accurate results when they examine a company's financial reports and perform an audit. A successful audit depends on the auditor's skills as well as the state of a company's accounting records, transparency of its operational reporting, and the provision of relevant paperwork by managers. Auditability rests on the access to all the information necessary to audit. Auditability can also be influenced by an auditor not being sufficiently independent of the entity being audited.

How Auditability Impacts Financial Audits

Audits are objective examinations tasked with determining whether a company's financial records are fair and factual. In other words, they help to prevent fraud and give investors peace of mind that the financial statements they base their buying and selling decisions to paint an accurate picture of financial performance.

Preparing an effective audit isn't always easy, though. Sometimes auditors may be prevented from doing their job correctly simply because they didn't receive access to a company's correct and complete financial information promptly.

The more problems an auditor encounters getting its hands on the records it's responsible for verifying, the less chance it has of reliably filing a thorough and accurate assessment of the company's financials.

Key Requirements for Achieving Auditability

Auditability hinges on obtaining access to the type of information necessary to put together an audit, and the records requested being well-organized, complete, and compliant with accounting standards.

Areas covered in the scope of an audit include assessing quality controls and risk management. Should a management team be unable or unwilling to provide auditors with the information, they need concerning these two areas, the auditor may decide to issue a qualified rather than a clean audit opinion on a company's financial statements.

Alternatively, it might determine a company's records are unauditable and terminate its relationship.

Important

The reputation of audit quality has come under fire after major global accounting firms were found guilty of overlooking several high-profile cases of fraud.

Other important factors that affect 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.

The Advantages of Ensuring Auditability

It is always advisable to cooperate with auditors as much as possible. Any company that is perceived as difficult to audit could face several damaging consequences.

Firstly, lenders often require the results of an external audit annually as part of their debt covenants. That means that companies at fault for not being adequately audited are susceptible to legal action, and no longer can borrow capital at reasonable rates to expand or keep their businesses afloat.

A lack of objective, external audits also tend to dampen sentiment in stocks. If investors have reason to question the integrity of a company's financial reporting and assume that it has something to hide, they will likely dump their holdings and perhaps even short-sell the shares.

Before long, regulators might be on the case, too. Word travels fast when companies don't play by the rules. If credible excuses aren't presented quickly, probes could be opened, resulting in hefty fines.

Critical Factors Influencing Audit Quality

Questions regarding audit quality have also brought attention and extra scrutiny to auditors themselves. The Public Company Accounting Oversight Board (PCAOB), a non-profit organization established by Congress to oversee the audit process for companies listed on stock exchanges, has investigated major global accounting firms.1

These companies include KPMG, Arthur Andersen, and Ernst & Young, all of which have come under repeated fire from the PCAOB for their failure to identify cases of fraud.234

The corporate scandals that took place at Enron and WorldCom are just two examples of auditors not doing their job correctly. Rather than identify these companies as un-auditable, accounting firms produced clean, unqualified opinions on them in their audit reports.