Chingo De Dinero

It is always interesting, to me, why external auditors must be used by all publicly traded companies. It all began back in the early 1930s. If you are at all familiar with American history, for the time, this is during the great depression. If you are not familiar, basically the late 1920s were high times, then everything came crashing down, the stock market, banking system, basically the economy in general. I do not want to get too much into the cause of this, but will discuss the government’s reaction.

One of the first things the government did was set up the FDIC, to insure bank deposit, thus improve trust in the banking system. Also, the wonderful Social Security program came along, to ensure our elderly are financially secure. Many other actions were taken, but to stay on track, laws were passed in 1933 and 1934 to regulate public companies (created SEC). The laws in 1933 apply to become public, what papers to file, how it must be advertised, what information must be communicated to purchasers, having the financial statements audited, etc. The laws in 1934 apply to ongoing reporting, 10k, 10q, etc. Getting back to my purpose here, the laws in the early 1930s required companies to have audited financial statements to become public, and to have their annual financial statements audited. Thus, guaranteeing business for external auditors.

This is where it began, but now the government has created Sarbanes-Oxley which requires external auditors to give their opinion on a company’s internal controls. So, basically, the external auditors require the company to prepare a ton of paper, and sign off if it is correct or not (not totally true).

The two services I described above are called attests services, which means the external auditors give their opinion, e.g.Financial Statements are correct, Internal Controls are sufficient. There are many other services, tax advise, financial system consulting, management consulting, etc. But, if the attest services, which are required by law, go away, all of the other services which the majority of money if made from is disappear quickly, or at least will be disbursed to different companies (my opinion).

So, if you couldn’t tell, I am not to fond of external auditors (even though I am an Accountant myself). The main reason is because it is government controlled. The only economic argument for them is that the borrowing cost for an audited company will be less, because they will be viewed as less risky. Maybe this is true, but the only way to see is to remove the government requirement, and let the market do its thing.

To recap, external auditors service the purpose of giving their opinion on the accuracy of a company’s financial statements.