Executive Summary: Dirty Guys Vs. Good Guys

Good Guys v/ Dirty Guys

Good Guys v/ Dirt Guys
America has recently been subjected to the dirty side of their economy. Record gains in almost all industries and stocks have feel out from beneath investors leading to distrust and a fair amount of head-shaking in the market. Companies that were trusted like Enron, Worldcom, Goldman Sachs, and others seemed to betray their investors at every turn, while the people responsible walked free with millions of dollars. What was happening here, according to some sources, was that these “dirty guys” were just smarter than the “good guys.” However, the American people replied all the same demanding tougher standards and it seems like they got them. This paper will serve as a guide to Generally Accepted Auditing Standards (GAAS), guide the reader through their use in financial, operational and compliance audits, and explain the
effects of the Sarbanes-Oxley Act of 2002 (SOX) and the ramifications thereof on the auditing world.
The Generally Accepted Auditing Standards are a list of standards that serve to give any audit credibility. While some of these seem like common sense, keep in mind that the aforementioned “dirty guys” were able to exploit vagaries in the system and keep auditors guessing for years. The GAAS is divided into three trees of standards. The first of which are general standards. The three general standards are roughly: 1) The auditor must be qualified to do the audit in question 2) The auditor must maintain a professional distance from the audited. 3) They must be professional in the auditing and reporting process maintaining their diligence throughout.
After that we have standards of field work: 1) The auditor must have a plan and supervise their assistants 2) The auditor must be able to scrutinize the information given to them 3) All opinions must be backed by evidence
Finally there are standards of reporting: 1) The auditor will report compliance with Generally Accepted Accounting Principles 2) The auditor will report all inconsistencies in accounting practice 3) The auditor must state when they feel they are not being adequately disclosed with 4) The auditor must state their overall opinion of the state of the financial reports.
Again these rules seem common sense but time and time again, auditors have been fooled by less than honest businessmen. However, should all these rules be followed, there is no reason an audit cannot go well and produce reliable results. In financial audits these standards are seen when the auditor is gathering evidence about the financial health of the company in question.
The image of the company is in the hands of the auditor at this point and the reports are used to gain investors or warn them. When a company seems less than candid and the auditor reports on it, investors read this as a red flag. Operational audits measure the efficiency or effectiveness of an organization or even a part of an organization. Compliance audits determine whether or not companies are following all pertinent rules and regulations. Which bring us to the Sarbanes-Oxley Act of 2002 (SOX). The SOX basically enhanced responsibility among all parties involved in the accounting process who up to this point had enjoyed a shared innocence that kept all of them wealthy and out of jail. In the context of auditing the SOX enhanced reporting standards and corporate responsibility and created the Public Company Accounting Oversight Board (PCAOB) which serves as the enforcement arm of the SOX and also regulates and proceduralizes
auditing. Some would argue that the SOX is costly. It has made companies report earnings conservatively. These people would be well reminded that conservatism is one of the founding tenants of accounting. Establishing the independence and review of auditors, hiring cronies became a thing of the past. All of the assessment is expensive and rarely ends in any spectacular findings. Proponents would say that the new standards have made companies more decent honorable “citizens.” Auditing should have always been this way. The thought of purchasing an audit and having that audit taken seriously is galling to this writer and that it went on as long as it did is a testament to the genius of the “dirty guys.” The Generally Accepted Auditing Standards, the three auditing processes, the clean-up initiated by the SOX, despite its costs have seemed to leveled the playing field at least for now. As always though the game is on. . .

All research from Modern Auditing by Boynton AND Johnson 8th ed