CPAs and Independent Auditors

An Independent Auditor is a CPA, or a CPA firm that provides a client company with an accountant's opinion about the accuracy of financial information of the company being audited.  Dependable financial information is essential to a number of different groups including:

• A credit professional making a decision about whether or not to grant trade credit; 
• An investor making a decision to buy or sell securities; 
• The bank loan officer deciding whether or not to recommend approval of a loan;
• A federal or State tax auditor trying to determine if the proper amount of tax was paid.

In some cases, the goals of the providers of financial information are not identical to those of the users. For example, a company trying to get a bank loan or applying for open account credit terms may want to make its financial statements look better than they are to improve the chances of being offered the loan or the line of credit it needs. This is where the need for independent auditors becomes obvious. Independent auditors are CPAs with the skills and integrity to be able to tell company outsiders whether the financial information supplied by the company is an accurate, complete, fair, and unbiased representation of the company's financial condition.

Improper accounting practices or decisions and/or inaccurate reporting tend to conceal waste and inefficiency, and thereby prevent economic resources from being allocated in a rational manner. For example, if customers present fraudulent or inaccurate financial statements creditors may make the wrong credit decision. A decision to extend credit is often based on a careful study of the customer or applicant's financial statements - combined with an examination of other information such as bank and trade references. But what happens if the financial statements submitted by the applicant are unreliable? For example, what would happen if the applicant's financial statements overstated current assets and annual earnings, and understated the company's liabilities? It is likely that the credit manager reviewing the data would be more likely to offer open account terms.

CPAs as independent auditors add credibility to a company's financial statements - meaning that the statements can be used by outsiders such as trade creditors, bankers, and stockholders to make informed decisions about establishing or maintaining a relationship with the company under review.  The American Institute of Certified Public Accountants (AICPA) is the largest professional association for CPAs in the United States.

Edited by Michael C. Dennis.  Mr. Dennis is a business consultant.