Are Public Companies Required to be Audited?Published July 21, 2020 • 2 min read
How often are publicly traded companies audited?
Yes. By law, the annual financial statements of public companies must be audited each year by independent auditors, accountants who examine the data for conformity with U.S. Generally Accepted Accounting Principles (GAAP).
A company’s management prepares its financial statements to inform investors and the public about its financial position and the results of its operations. The company’s auditing committee then hires an independent auditing firm to examine its statements and other related disclosures. An organization’s auditing committee consists of board members responsible for overseeing its financial reporting and disclosures.
The audit committee oversees the auditors’ work and also monitors any disagreements between the auditors and company management regarding financial reporting.
Public company audit teams are made up of accountants and other professionals under the leadership of senior certified public accountants who work at an accounting firm. Audit team members are chosen based on how their individual skills match the particular requirements of the company needing the audit.
A relatively small team of accountants assembled by one of the hundreds of audit firms registered with the Public Company Accounting Oversight Board (PCAOB) may conduct the audit of a smaller business. However, hundreds of professionals from one of the larger PCAOB-registered audit firms would likely conduct the audit of a complex, global enterprise.
Who audits the financial statements of corporations?
The auditors examine a company’s accounting books, transaction records, and other relevant documents to determine if it has presented its financial statements fairly. The auditors also ensure that the financial statements don’t contain any material misstatements.
The auditors then prepare a written audit report containing an opinion on the organization’s financial statements and file it with the U.S. Securities and Exchange Commission (SEC). The audit report that’s on file with the SEC is available to investors and other interested parties.
The main goal of the audit report is to give capital market participants, investors, and policymakers “reasonable assurance”—beyond the company’s own declarations—that they can rely on the financial statements for investment decisions and other purposes.
As well as auditing a company’s financial statements, auditors often evaluate the effectiveness of an organization’s internal controls over financial reporting. Internal controls are procedures created by management to address the risk of misstatements and material errors in financial statements. Auditors can increase the confidence of investors by attesting that an organization’s internal controls are effective.
The audit requirements for private companies are different than those for public companies. Both public and private companies are subject to generally accepted accounting principles, although for different reasons.
The SEC requires publicly traded companies to provide GAAP-compliant audited financial statements. Private companies may be subject to GAAP requirements to satisfy lenders, insurance companies, or certain classes of shareholders. However, many private companies don’t issue audited financial statements. The main concern of private organizations is reducing taxes; consequently they often only prepare tax returns and statements that aren’t audited.