DirectorsatWork 219gage in huge numbers of financial transactions during the course of
the typical financial period, usually one year. Instead, audits are con-
ducted on a “test basis” by reviewing a sample of the hundreds or
thousands of transactions of a variety of kinds engaged in by the firm
over time.
Second, with respect to the detection of fraud, neither the au-
ditor nor the audit committee is always in a position to root it out.
This is the case principally because it is impossible for the audit to
include an examination of every single transaction in which a com-
pany engaged or in which management says it engaged.
Third, the auditor must be independent of the company, a re-
quirement imposed by the canons of professional responsibility of
the auditing profession; so too must the members of the audit com-
mittee, a requirement of stoc kexchange rules endorsed by the SEC.
Audits lacking impartial and objective professional judgment fail to
promote financial reporting integrity. At best, they end up function-
ing as merely another type of internal control.
Audits are harmful if they carry a false appearance of indepen-
dent certification that induces undue reliance. Also, since effective
independent audits include testing internal controls, the integrity of
those systems is undermined by a nonobjective and potentially bi-
ased audit that diminishes rather than enhances overall integrity.
Audit firm independence is a hot topic. The big global auditing
firms have expanded their businesses beyond the traditional audit
function to include consulting and other practices that could in
some circumstances compromise their ability to contribute integrity
to financial reporting. These firms have merged, restructured, or
been acquired by other corporations. Their clients and business are
evolving into more sophisticated, technologically advanced, and
transnational operations.
The SEC established the Independence Standards Board (ISB)
to address auditor independence issues,^17 but it remains a principal
responsibility of the board of directors and its audit committee to
assure an independent financial review. Those in charge are account-
able for adopting a diligent and alert mind-set that lets them rigor-
ously assess the company’s internal controls, the testing of its
reported accounts, and the likelihood that what they see account-
ingwise is what really happened businesswise.
The audit committee is the one place where independent direc-
tors are called for, but independence is not as essential as expertise
in accounting and/or auditing, as the new stoc kexchange rules now