No matter what industry they’re in, the best way a corporation can stay both competitive and compliant is by conducting regular audits. Audits can accomplish this because they reveal problems that otherwise would have remained hidden. A corporate audit digs up what’s under the surface and ensures that everything continues evolving. Without them, hidden problems could easily become paralyzing issues. This is why the corporation itself pays for and takes care of its audits – to keep track of problems they’re often too close to see.
This practice gives rise to a pair of interesting questions. What motivates corporations to perform their internal audits? Just as importantly, what is it that actually happens during an audit?
Description of a Corporate Audit
In the simplest terms, a corporate audit is nothing more than an up-close inspection of how the corporation functions. Audits can be used to look under the hood of things like daily operations, bookkeeping practices, workplace safety, and what goes into company decisions. When a company is traded on the stock market, it has to live up to some pretty lofty standards.
External and internal audits both use the 2002 Sarbanes-Oxley Act to ensure that a corporation is adhering to industry regulations, but they’re conducted and hired by very different entities. We’ve already seen that the corporation hires an internal auditor. On the other hand, an external auditor is usually brought in by some sort of commission or a government agency.
What is the Purpose of a Corporate Audit?
If members of the public can buy shares in a company, certain laws require them to conduct and report on internal audits. The motivation behind these laws is to make sure upper management can’t legitimately claim that they didn’t know about any violations. Internal audits also ensure that CEOs and department heads can resolve problems before they do any serious damage.
Additionally, internal audits help management understand the company’s daily operations. This isn’t as necessary with smaller corporations, but once they’ve started to grow, management types are too busy with administrative duties to stay abreast of everything on their own. One area where internal audits are particularly helpful is in risk management. Injuries are a major concern for just about every corporation, and an internal audit is perhaps the best tool to keep them from happening.
What Happens During an Audit?
Larger corporations have departments that do nothing but conduct internal audits. However, small companies usually can’t afford to maintain a department that focuses exclusively on audits. That’s why smaller companies typically have only one auditor to inspect their business procedures and records. If they don’t have an auditor on staff, they can hire an outside firm to conduct their audits for them.
What Happens if an Internal Audit Uncovers a Problem?
This is where another difference exists between large and small companies. Small corporations tend to have fewer problems, and anything the auditor does find is usually pretty easy to fix. On the other hand, the auditing departments of big companies sometimes reveal a veritable mountain of problems. An auditing department is usually led by a Chief Audit Officer. When problems occur, it’s up to the Chief Audit Officer to inform the company’s board of directors. After that, the company is quick to take corrective actions, hopefully before the problems become too difficult to handle.
In addition to meeting legal requirements, corporate audits can improve a company’s risk management significantly and head off serious issues before they have a chance to arise.
About Stewart R. Custis, CPA
CPA with 20+ years assisting individuals and small businesses navigate the ever changing and ever complex tax and accounting regulations.
Email: [email protected]
License ID: 29421 – State of Virginia