Where Auditors Now Play a Strong Role in Capital Markets

Investors, lenders, and other users of audited financial statements can more confidently use this information because auditors have provided an independent perspective. This assessment, in other words, builds trust and confidence. Without that trust and confidence, market volatility would likely increase, investors and lenders would likely charge a higher cost of capital for their risk, and fewer funds would be available to fuel business investment and growth. Consistent, reliable, and comparable financial statements underpin robust capital markets.

Typically, companies in the United States prepare financial statements in accordance with US GAAP. Auditors conduct an audit to obtain sufficient appropriate evidence to obtain reasonable assurance as to whether management has prepared financial statements that are fairly presented in accordance with US GAAP in all material respects.

Auditors then issue an opinion as to whether the financial statements present fairly—in all material respects—that the financial position, results of operations, and cash flows of the company are in conformity with US GAAP.

Audits have a positive effect on companies by serving as guardrails for management on accounting financial reporting practices. Auditors also provide an independent perspective and resource for audit committees in their role in the financial reporting process. Before an audit opinion is issued, auditors spend countless hours evaluating the design and effectiveness of the company’s internal controls and identifying potential issues in financial statements. As a result of this interaction and dialogue, companies improve their financial processes and controls, remedying issues before they become major financial concerns. This behind-the-scenes scrutiny also bolsters a culture of professionalism, discipline, and accountability within public companies.

The US system of financial reporting has a track record of success. Financial restatements have trended down since 2010, as has the magnitude of what gets corrected. Meanwhile, levels of investor confidence have stayed healthy. In fact, nearly three-quarters of retail investors in a 2019 survey expressed confidence in US capital markets, which is consistent with past years. When audit failures occur, they are investigated and addressed, with the lessons learned incorporated into the cycle of continuous improvement.

"The bedrock of this capital market system is high-quality, reliable financial statements. This is indisputable. Without high-quality and reliable financial information, capital markets do not function well."
Joint SEC/PCAOB Statement “The Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally” December 2018

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Where Auditors Could Play a Greater Role in Company-Prepared Information