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Value Added by Auditors and Accountants
By Tom Crouch, CPA, CIA, CISA, & Otis Singleton, CPA
Accounting is often portrayed as boring and unimportant. Accountants and auditors are depicted in a similar manner. What investors forget is the value added to an organization by these professionals. The reality is that auditors and accountants help create, maintain, enforce, test and evaluate the internal financial controls of an organization. This process helps provide accurate accounting results and tends to keep business risks lower over many years. The value added by these services is not always fully appreciated by investors until bad accountants and unethical auditors combine to fleece investors.
Companies issue stock and they seek to maximize shareholder wealth or, simply put, maintain high stock prices. The stock price is greatly impacted by earnings and the associated business risk. The companies that have good accountants and auditors with high ethical standards should generally provide investors with a lower business risk when compared to other companies, thus providing a higher share price.
Companies, governmental entities, and many other groups issue bonds that are dependent on business risk for pricing and the determination of interest rates or borrowing costs. Good internal controls and good audit work should tend to keep business risk low, bond ratings good, and interest expense low. Weak or bad internal controls and untrustworthy auditing would tend to cause bond ratings to be lowered and interest expense to increase. Good internal controls and good audit work should usually yield a higher bond price than the bond price when the internal controls are weak and the auditing is careless.
What if the most objective stock analysts and bond rating groups thought an entity's internal controls were weak and the auditor's had minimal credibility? The additional interest expense over many years and the lower price for the stocks and bonds could represent a huge adverse financial impact. The potential additional interest expense and the lower stock and bond prices should easily cost justify additional internal control efforts by those responsible for managing the financial processes.
The real excitement related to accounting work and audit work could be viewed as the huge interest expense savings by having good auditors and good accountants. Maintaining and continuing a professional and ethical environment for accountants and auditors can add real long-term value to stocks and bonds.
Copyright © September 24, 2002 - by Tom Crouch and Otis Singleton. This text may be forwarded via fax or e-mail so long as the copyright is shown. This text may be republished in any professional publication or web site so long as the copyright is shown. All other rights are reserved.
The opinions, beliefs and viewpoints expressed by the various authors and forum participants on this web site do not necessarily reflect the opinions, beliefs and viewpoints of AuditNet®
