The term “audit” lends itself to a variety of situations that may not be considered when first considered. Most people probably think of the standard IRS audit – the process by which an individual’s tax return in put into question and their financial background is probed and prodded until their actual body displays soreness. But auditing extends much further than that. In its purest reform, it is nothing more than a review. When businesses refer to audits, this is typically what they are referring to. It is critical that a business audits its own records to ensure their accuracy for ensure that future decisions are made with the proper background information.
Unlike personal finances, where most individuals typically have a pretty good idea of where their bottom line stands without consulting their bank records, businesses are larger entities that contain a number of moving parts that often makes it difficult to determine where the bottom line stands at any given time and (more importantly) where it looks to be at a given point in the future. Having a strong knowledge of your financial standing (both on the macro and micro scales) allows managers to make a variety of important decisions quickly and more confidently than they would be if flying blind.
While the situation being described here would be called an internal audit, this is primarily because it is initiated by the organization looking to be audited. But, objectively, it is often best to have the audit performed by an external third party. Consulting firms can look at balance sheets with fresh eyes and may pick up on things that are just glanced over by internal accountants. They also are less likely to be affected by biases (not necessarily intentional) that are felt by internal accountants towards employees, managers, or projects that they have an affiliation to. Unfortunately, a third party firm is no guarantee of ethical and upright accounting, as proven by a certain big five accounting (who no longer exists) when investigating one of the biggest companies in the world headquartered down in Houston. In that situation, the consulting party had a conflict of interest based upon its ongoing business relationship with the company.
Another reason for a business audit includes keeping an eye on one’s employees. The phrase “trust but verify” may be most appropriate for this situation. Truth be told, some of the most elaborate internal thefts that have occurred in the business world over the years could have been prevented by internal audits. This is more about making sure that controls are enforced rather than spying on employees. There is no expectation of privacy when it comes to the use of company funds.
It is important to understand that, unlike a personal audit, a business audit is a good thing. It is a necessary part of a company’s checks and balances system. It is about knowing. It keeps management in the know for where they stand and where they are headed. If the information is properly compiled and used, it helps to ensure good future strategy and gives CEO’s the ability to avoid bad decisions.