Role of Auditor the Role

Role of Auditor

The role of the auditor, in its basic form, is to ensure that the statements produced by public companies accurately reflect the financial condition of the company, in accordance with the prevailing accounting principles. This role, however, is evolving, especially in light of a series of accounting scandals ten years ago and the enactment of the Sarbanes-Oxley law, which created the Public Company Accounting Oversight Board (PCAOB). The role of the auditor, therefore, is indispensable. Auditors provide a safeguard against accounting fraud, and they ensure that the information on which financial decisions are made is accurate within the confines of the law.

Free markets function properly when the market participants, especially the investors on whose money the markets rely for their existence, trust in the market. This trust is dependent on a relative absence of fraud. Financial statements for publicly traded companies are governed by a set of rules that are laid out and enforced by regulators, and this allows market participants to be certain that the statements are free from fraud and misrepresentation. The consistent format of financial statements allows market participants to easily understand the financial condition of a company. Thus, transparency is one of the most important aspects in free markets, because the more easily and accurately that information is transmitted, the more efficient the markets can be. Auditors also play a critical role in improving the transparency of financial statements, and therefore auditors in indispensable in free markets.

One of the major issues with financial statements is that if those statements contain information that is not true -- either by error or by fraud -- the statements will not convey information accurately. When market participants do not trust in the information they receive, the market will lose participants as people seek opportunities that carry less risk. Johnson (2010) notes that auditor's play an especially key role in fraud detection. This is because auditors have a high amount of expertise in analyzing financial statements, with particular focus on being able to determine when fraud has potentially taken place. The forensic accounting capabilities of auditors are then put to work, to ensure that fraud has not taken place. The participants in free markets benefit from this work because it reduces the risk associated with their investments. Over time, this reduced risk will encourage more money into the markets, as the markets are viewed as a safe place for capital.