Companies can undergo annual financial audits.
Financial auditing is an accounting process used in business. It uses an independent body to review a company’s financial statements and transactions. The ultimate goal of this form of auditing is to present an accurate account of a company’s financial transactions. The practice is used to ensure that the company is dealing financially fairly and also that the accounts it is presenting to the public or shareholders are accurate and substantiated.
During 2001-02, Enron was found to have manipulated significant portions of its financial information.
The results of the audit procedure can be presented to shareholders, banks and anyone interested in the company. One of the main reasons for a financial audit is to ensure that the trading company is not making any mistakes. That’s why this is done by an independent third party.
Public records show that this process has been done since 1314, but prior to the 1930s no corporation or business was legally required to do so. In 1934, the United States Securities Exchange Act made this a legal requirement for all public trading companies. The Securities and Exchange Commission (SEC) created a department to deal specifically with this requirement and generally works with the accounting industry on its standards.
Major scandals rocked the accounting industry in the early 2000s.
The financial audit process generally takes place once a year, most commonly at the end of the financial year. All financial aspects of the company are inspected, and a follow-up audit can also be carried out after the end of the year in order to compare results. The auditor has the difficult task of maintaining objectivity while being paid by the company he is auditing.
Financial audits help ensure that commercial enterprises are using ethical financial policies.
Audits are usually a complete process, but in some cases, failures do occur. The 2001 Enron scandal was a case in point, in which a company hid important facts and figures from both interested parties and banks. Enron filed for bankruptcy and one of the world’s largest accounting firms, Arthur Andersen, lost its right to audit.
Major incidents like this forced tighter and tighter regulations on the financial audit process. Many innocent people lost huge amounts of money because unscrupulous companies hid their financial details. Unfortunately, many of these stricter auditing regulations came too late for people who lost their savings.