Financial auditing is an accounting process used in business. It uses an independent body to examine a business' financial transactions and statements. The ultimate purpose of this form of auditing is to present an accurate account of a company's financial business transactions. The practice is used to make sure that the company is trading financially fairly, and also that the accounts it is presenting to the public or shareholders are accurate and justified.
The results of the audit procedure can be presented to shareholders, banks and anyone else with an interest in the company. One of the main reasons for a financial audit is to ensure that the trading company is not practicing any deception. This is why it is done by an independent third party.
Public records show that this process has been done since 1314, but before the 1930s, no corporations or businesses were legally required to do so. In 1934, the United States Securities Exchange Act made it a legal requirement for all public trading companies. The Securities and Exchange Commission (SEC) set up a department to deal specifically with this requirement, and it usually works with the accounting industry as to its standards.
The financial auditing process usually takes places once a year, most commonly at the end of the financial year. All financial aspects of the company are inspected, and a follow-up audit may also be undertaken after the year end in order to compare results. The auditor has the difficult task of maintaining objectivity while being paid by the company it is auditing.
Audits are usually a thorough process, but in some cases, failures occur. The 2001 Enron scandal was a case in point, in which a company hid important facts and figures from both stakeholders and the banks. Enron filed for bankruptcy, and one of the largest accounting firms in the world, Arthur Andersen, lost the right to audit.
Major incidents such as this have forced tighter and stricter regulations in the financial auditing process. Many innocent people lost huge amounts of money because unscrupulous companies hid their financial details. Sadly, many of these stricter auditing regulations have come too late for the people who lost their life savings.