An auditor is a certified public accountant or CPA who reviews a company's financial statements and certifies that they comply with current accounting standards. Most major companies hire leading accounting firms to audit their books.
The auditors are the investors' first line of defense against various kinds of business fraud. They assure that the assets claimed on the books are real and that operations of the business make and sell products or provide services as described. Several famous big business scandals are audit related. Some of them are--
Enron. Company losses were concealed from shareholders by financial devices that kept the losses off the company's financial statements. Their auditor seemed to have a conflict of interest in that they acted both as auditors of the Enron books (Enron was a major client), and as consultants providing advice on methods to "defer reporting" losses. Meanwhile key executives claimed they had no knowledge of the abusive use of these devices. The Sarbanes-Oxley Act was enacted into law to require that executives certify compliance with audit requirements (and to make them subject to prosecution without having to prove they intended to defraud.
Phar-Mor. The discount pharmacy department store was able to conceal losses and probably embezzlement with a ficticious set of books. Because this resulted in shortages of cash, computer-generated checks paying wholesalers for merchandise could not be mailed and had to be hand sorted to keep supplies flowing.
Equity Funding. Fake orders were maintained in a computerized accounting system but documentation created by hand (in policy writing parties) kept auditors from detecting that the company was insolvent.
Related Fool Articles
Recent Mentions on Fool.com
- Cardiovascular Systems Inc is Crashing Today: Here's Why
- The One Thing I Always Do Before Buying a Stock
- Getting Audited? 5 Things You Should Know
- Zoe's Kitchen Q2 Results: Underwhelming, at Least for a Picky Market
- 3 Important Lessons Investors Need to Learn From Linn Energy's Payout Suspension
- Ocwen Financial Takes an Earnings Hit, but Stays Upbeat