White-collar and corporate crimes are some of the hardest crimes to bring to justice. There are two reasons for this is. The first is because it is challenging to find out who was behind the crime. If it is determined that a company has been recording its liabilities as equity, to increase its liquidity, it will be difficult to isolate the perpetrators because the whole accounting department cannot be held responsible. The second reason is that companies act very quickly to fix problems before anyone notices that they have occurred. Big companies do not want anyone to know about white-collar or corporate crimes that have been committed, because they want to preserve their reputation among their stockholders. If word gets out that an executive has been embezzling money, or the accounting department has been baking the books, the stock price will plummet.
The process of internally mitigating these crimes can sometimes be complicated because the ownership of the company, it’s stockholders and board of directors, are generally very out of the loop regarding the daily operations of their company. This disconnect is called information asymmetry, and it occurs when the management of the company knows more than the ownership. This is where auditors come in. Auditors, specifically external auditors, work to bridge the gap between the management and the ownership to shed some light on the operations of the company and expose whether or not the financials fairly represent the position of the company.
There are two types of auditors, internal and external. Internal auditors work for the company that they are auditing to ensure that the financials are being reported accurately. These auditors report to the management, and their findings are not posted to the public. On the other hand, external auditors work for an auditing firm, such as Deloitte or PwC, and are hired by the board of directors. External auditors report to the board of directors, and eventually, the public.
At the end of the audit, which can take months, the external auditing team publishes an opinion about whether the company’s financials fairly represent the company. This opinion is part of the company’s annual report, which is available to the public. There are three types of opinions: unmodified, qualified, and adverse. The “clean” unmodified opinion means that the auditors found nothing wrong with the company’s financials and internal control. A qualified opinion suggests that the company’s financials are mainly good except for some errors in accounting policy, presentation, or estimates. A qualified opinion is not good, but it will not break a company. Finally, an adverse opinion is bad and means a company’s accounting system has significant errors that are painting an inaccurate picture to the stockholders about how the company is doing financially. An adverse opinion will likely break a company, which is what happened in the early 2000s with WorldCom. After an $11 billion accounting fraud was exposed by their auditing firm, Arthur Andersen, the CEO was convicted and sentenced to 25 years in prison, the stock price plummeted, they were severely fined by the SEC, and declared bankruptcy in 2002. The WorldCom remains the biggest accounting scandal in US history.
The function of an auditor is vital. If no one investigated the accounting systems of major corporations, the entire stock market would be based on baked books and fallacious growth metrics. While most people think that being an auditor sounds less exciting than watching paint dry, I believe that it is fascinating. I was first exposed to the auditing profession during my Perspectives 2002 class. Since then, I have been working hard to position myself as a strong candidate to work for one of the Big Four auditing firms; Deloitte, PwC, KPMG, or EY. Each of these firms has offices in Atlanta, and I am currently in the candidacy process to become a summer intern at PwC and KPMG.
Aidan's Audit 