Auditors: Friends or Foes?

Register now

IMGCAP(1)]Every day, the public places their trust in two seemingly unrelated entities: public auditors and the police.

Financially, they place their trust in auditors’ opinions and reporting, and they place trust (in the truest form of the definition) in the police.

Both institutions constantly face situations where they must use their judgment with regard to materiality, while maintaining an independent, bias-free opinion. In addition, both must adhere to their own internal and external set of pronouncements, regulations, codes and laws. Finally, investigative behavior contributes heavily to each of their respective everyday job descriptions.

Auditors “investigate” their clients’ records and practices in order to complete an audit, and the police investigate to learn what occurred in a traffic accident or crime scene.

While a form of investigation may be required by both parties, the results of the police investigation may not always be relied upon as heavily or as widely as the results of the audit. The subsequent opinion produced by the audit is used by regulators to ensure that public companies are upholding their ethical and legal responsibilities in the best interest of the public, allowing efficient functionality and fluidity within all of the financial markets.

Throughout all of this, it is evident that no one is advocating for the client. The question is: are auditors a friend or a foe?

The Breakdown
Before that question can be answered, let’s break down the relationship between an auditor and a client. In order for any company to comply with existing laws and regulations, and satisfy investors, creditors and shareholders, it must be audited. Once a team of “suits” has inspected, picked apart, reviewed and analyzed all the necessary paperwork, an appropriate opinion will be produced. That opinion will then be presented to the required external and internal users.

One might expect that when a company is required to complete this type of invasive examination, the company wouldn’t have to pay for it. That isn’t the case. A company is required to hire a firm and pay for its own audit, regardless of the result, and it will repeat the process as many times as it takes to obtain an unqualified opinion. Individuals hire lawyers and doctors to act as their advocate and defend them against a lawsuit or a disease (respectively). Yet public companies hire auditors because of an obligation to scrutinize their financial statements, to pick apart their operations and to question their continuity, not on their behalf, but on behalf of the public, outsiders and government agencies.

Therefore, the answer to the question presented earlier is no, auditors are not “friends.” The relationship between an auditor and a client must be treated with care as we are both attempting to establish a form of trust out of a necessity to survive. It is evident that the dynamics of this relationship, as they presently exist, are a clear conflict of interest.

Police Perceptions
When deconstructing the public’s relationship with the police force, there are predominantly two categories: the good and the bad. Those categories are enhanced and influenced by two factors: perception and reality. Recently, the scenario concerning the actions of the police force and its interactions with the public has further and irrevocably blurred the line between perception and reality, as there is one other major participant involved: the media.

Unfortunately, the media portrays and sways the public’s opinions and views of the police force and its “victims” towards either good or bad, as they don’t include all of the facts. All the media cares about is sensationalizing, and consequently, so does the public. As a result, the relationship between the police and the public becomes more and more defined. With these outside influences painting a distorted picture of the police force and the victims, the public must choose a side, further widening the gap between the two categories of good and bad. Of late, in terms of the public’s opinion of the police force, perception (regardless of experience) most often becomes reality. Thus, who are the police? Friends or foes?

The Solution
In order for us to perform our duties ethically—on behalf of the public and external users—we as auditors must remain completely unbiased when rendering our opinions. Considering that the current relationship between auditors and clients is based upon compensation from the client, how can one expect all auditors to remain completely unbiased? Unfortunately, one can’t. The current relationship between us and our clients leaves the door wide open to undue influence.

Basically, to obtain and integrate a solution, the original question presented must be addressed again. Who are auditors: friends or foes? The answer is we must be neither! A solution can only come once the ability to have or start a relationship is removed from the equation, thus terminating any conflicts of interest. In order for all auditors to remain completely unbiased and to prohibit a client from attempting to compromise that bias, clients simply cannot directly compensate us. Further, clients should not be allowed to choose the firm they work with. If one firm has rendered a favorable opinion in the past, that client will most likely continue to recruit that same firm in hopes that they continue to render those favorable opinions.

In conclusion, it is very important that some change occur within the current relationship between us and our clients. The current system allows for too much opportunity to influence the ethical actions of both parties. Any attempt to influence one’s ethical actions in exchange for financial gain is simply unethical and illegal. Luckily, the switch-up in the business world seems rather practical. Unfortunately, practical does not mean it will be free of issues or problems. Nevertheless, everyone needs to come to the realization that the system is enabling crime. Notwithstanding the many kinks that need to be worked out, it’s extremely important that changes be made as soon as possible to mitigate the ongoing unethical activity.

Jillian Rojas recently completed an MBA program in accounting at St. Joseph’s College in Patchogue, N.Y.

For reprint and licensing requests for this article, click here.