Considering the history of lapses in quality by outside auditors of smaller public companies, these organizations might want to focus on implementing better internal controls. Initiatives as larger corporations are establishing strong internal audit groups comprised of accountants with successful study for CPA exam completion. A report by the Securities and Exchange Commission indicates that most of the audit deficiencies between 1998 and 2010 occurred at small public companies.
About 9,500 public entities file financial statements annually with the SEC. Over the 13-year period studied, 87 fraudulently filed financial reports allegedly involved auditors who failed to follow principles from CPA study. The fraud cases span a variety of industries, but the typical company size was small – meaning that assets and revenues were less than $40 million.
Improving audit quality by detecting fraud is certainly a goal of the accounting profession, which commissioned the SEC study. The Center for Audit Quality has a vital mission of enhancing the identification of fraudulent financial reporting. A core objective is strengthening the execution of audit procedures according to the basic elements from CPA courses. Among these accounting standards are areas of deficiency noted by the SEC, such as evaluation of audit evidence, due professional care, skepticism, and the audit opinion.
Systems established by company management are also an important factor in uncovering financial fraud. The Sarbanes-Oxley Act requires added attention to high-risk process, which has led to rising costs at large companies plus an increased role for IT controls and testing reports. Further improvements to the audit process and SOX compliance demands intensifying scrutiny at smaller organizations of financial reporting, accrual processes, stock options, and tax measures. The implication is that renewed attention to control documentation is needed. That is a role for internal teams possessing knowledge from CPA preparation just like outside auditors.
Internal audit is increasingly driving walkthroughs and documentation around processes. A recent survey by global consulting firm Protiviti reveals that more companies moved responsibility over SOX compliance from project management offices to internal audit departments. This change aligns with guidance from the SEC as well as the Public Company Accounting Oversight Board. Shifting greater responsibility to the internal audit function gives external auditors more reliable information. External auditors are using less documentation, walkthroughs, and testing performed outside of internal audit. Meanwhile, external auditors increasingly have the benefit of quality work completed by internal audit that follows practices consistent with courses for CPA study.
The costs for SOX compliance have been considerable. However, an unexpected benefit for the accounting profession is advances in the internal audit function. The result of better quality control over financial reporting by large organizations should inspire moves by smaller entities to expand internal audit.
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