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Weighing the Worth of an External Audit

Colleen Cunningham | April 27, 2010

So much has been written lately about accounting scandals, audit failures, and the financial crisis. Reforms have been passed, yet accounting problems persist. This prompted me to ask: What’s the value of an external audit at all these days?

In the beginning, the purpose of an external audit was to validate the accounts of management for the suppliers of capital. Over time, auditing evolved from providing a service to the suppliers of capital (a private good) to a service for investors (a public good). The current audit is required as a result of the 1933 and 1934 Securities Acts (which came about as a result of the stock market crash of 1929). These acts required that public companies obtain an audit from a registered certified public accounting firm. The acts require that an audit provide reasonable assurance that the financial statements are fairly stated.

The objective was to determine that the accounting records are accurate and complete,...

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