524 Making Key Strategic Decisions
Published Financial Statements
The audit committee does not conduct audits; it relies on two other groups to
do this. One is the outside auditor, a firm of certified public accountants. All
listed companies are required to have their financial statements examined by
an outside auditor, and most other corporations do so in order to satisfy the re-
quirements of banks and other lenders. The other group is the company’s in-
ternal audit staff, a group of employees whose head reports to a senior officer,
usually the CEO or chief financial officer (CFO).
Selection of Auditors
Ordinarily, management recommends that the current auditing firm be ap-
pointed for another year and that its proposed audit scope and fee schedule be
adopted. After some questioning, the audit committee usually recommends ap-
proval. The recommendation is submitted to shareholders in the annual meet-
ing. Occasionally, the audit committee gives more than routine consideration
to this topic.
There may be advantages to changing auditors, even when the relationship
between the audit firm and the company has been satisfactory for several
years. One advantage is that the process of requesting bids from other firms
may cause the current firm to think carefully about its proposed fees. How-
ever, the public may perceive that a change in outside auditors indicates that
the superseded firm would not go along with a practice that the company
wanted. The SEC requires that when a new auditing firm is appointed, the rea-
son for making the change must be reported on its Form 8-K. Also, because a
new firm’s initial task of learning about the company requires management
time, management may be reluctant to recommend a change.
Public accounting firms often perform various types of consulting en-
gagements for the company: developing new accounting and control systems,
analyzing proposed pension plans, and analyzing proposed acquisitions. Fees
for this work may exceed the fees for audit work. The SEC and the stock ex-
changes have strict rules that prohibit a public accounting firm from conduct-
ing an audit if it has consulting engagements with the corporation that might
affect the objectivity of the audit. Some auditing firms have responded to
these rules by setting up a separate firm to conduct these engagements.
The Audit Opinion
In its opinion letter, the public accounting firm emphasizes the fact that man-
agement, not the auditor, is responsible for the financial statements. Almost all
companies receive a “clean opinion”; that is, the auditor states that the finan-
cial statements “present fairly, in all material respects” the financial status and
performance of the company in accordance with GAAP. Note that this state-
ment says neither that the statements are 100% accurate nor whether different