The independence of the auditor, in both fact and appearance, is foundational to the credibility of the financial statements. The PCAOB’s inspections program has successfully led to significant improvements in audit quality since it was first created by SOX nearly twenty years ago. capital markets’ disclosure regime is designed to promote high quality audits through the adherence of accountants to rigorous independence, quality control, and auditing standards performed under the oversight of an effective audit committee and subject to Public Company Accounting Oversight Board (“PCAOB”) inspections.
In order for an audit to effectively protect investors, an objective, impartial, and skilled professional must perform the audit in accordance with an appropriate framework.
Notwithstanding the importance of assurance to all stakeholders, not all audits are created equal. Apart from debt-related benefits, an audit may also help a private company prevent fraud and aid in the evaluation of management. private companies that voluntarily release audited financial statements experience lower costs of debt than unaudited companies. Research shows, similar to public companies, U.S. Similarly, external stakeholders for many other types of entities also require assurance over financial information because of the desire for increased confidence in the reliability and quality of the information. īecause of these benefits, historically even absent requirements for audited financials, many publicly-traded companies voluntarily released audited financial statements. In a recent survey, 77% of public company respondents stated that their independent auditor provided important insights about the company. Additionally, companies often benefit in other ways from the services of an independent auditor. Research also shows that an independent, high quality audit improves the credibility of financial statements reducing risk to investors, thereby lowering the cost of debt and the cost of equity for the company.
Academic studies demonstrate that assurance provided by an independent auditor reduces the risk that an entity provides materially inaccurate information to external parties, including investors, by facilitating the dissemination of transparent and reliable financial information. While all gatekeeper roles in producing high quality financial disclosures are critical, it is undisputed that assurance provided by independent public accountants improves the quality of financial disclosures and, in turn, such assurance is a critical component of our capital markets. An integral part of the faithful implementation of SOX is for audit firms to remain independent of their audit clients and for audit committees to take ownership of their oversight responsibilities with respect to the independent auditor. As we mark the upcoming twentieth anniversary of the enactment of the Sarbanes-Oxley Act of 2002 (“SOX”), it is critical for all gatekeepers in the financial reporting ecosystem (auditors, management, and their audit committees) to maintain constant vigilance in the faithful implementation of the requirements of SOX by fulfilling their shared responsibilities to continue to produce high quality financial disclosures that are decision-useful to investors and maintain the public trust in our capital markets.