CHAPTER 7: ACCOUNTING, RECORDS, AND ASSOCIATED REGULATIONS
Today, however, internal and external auditors have a critical role, which is governed by strict laws and regulations. Internal auditors evaluate how well the control processes designed by management function and, therefore, the extent to which management can have reasonable assurance that business objectives will be realized. Because of their expertise and thorough knowledge of operations, internal auditors often fulfill a consulting role to top management. The auditor’s role must be independent and protected from any influence, relationship, or pressure. External auditors should not be influenced or unduly pressured to provide opinions in order to maintain a good relationship with the client company. Enron provides an illustration of the failure to remain independent. In this case, Enron, a large publicly held U.S. energy company, engaged Arthur Andersen LLP as their auditors while also employing them as consultants, creating a conflict of interest. In the early 2000s, it came to light that Enron employees intimidated Andersen auditors to misrepresent the company’s true financial position, and that Andersen deliberately ignored Enron’s accounting irregularities. Upon being investigated by the U.S. government, Andersen destroyed documents that would have been incriminating. Andersen was convicted for obstruction of justice, fined half a million dollars, and went out of business soon after. Enron was also dissolved, and Enron’s CEO was sentenced to 14 years in prison for fraud. An auditor should have strong ethics and integrity so that the shareholders and officers of the company are provided with an objective, unbiased, and professional opinion on: The accuracy of the financial records; Whether proper controls are in place to protect the organization’s cash from misappropriation and fraud; and That the financials can be relied on as a true and fair representation of the financial position of the company. In part due to the Enron scandal, the issue of the independence of the auditor inspired Senators Sarbanes and Oxley to draft the Sarbanes-Oxley Act in 2002, which dramatically changed the role of internal auditing organizations around the world. A major element of the Act requires that companies provide reports on the effectiveness of their internal controls. This has resulted in a shifting focus for internal auditing, moving from purely financial audits to a larger role in the area of operational audits. Internal auditing now has the ability and responsibility to assess financial compliance and operational compliance. “Internal auditing provides a broad-based, independent, value-adding function that is essential for the effective management of a firm. The value of internal audit has been greatly enhanced by the passage of the Sarbanes-Oxley Act of 2002.” 4 EXTERNAL AUDIT PROCESS Corporations engage outside auditors to review the financial records of the organization and to report to the board of directors any deviations from generally accepted accounting principles and any unusual discoveries that might mean that the financial statements are not being reported accurately.
4 https://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/internal-auditing
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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