Glossary
Auditor
An independent accounting firm that examines a company's financial statements and gives an opinion on whether they are fairly stated.
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An auditor is an independent accounting firm hired to examine a company's financial statements and state whether they present the company's financial position fairly, in all material respects, under the applicable accounting rules. For a US public company the opinion appears in the annual report alongside the financial statements, and it is one of the main reasons investors can trust reported numbers at all.
How an audit works
Auditors test a company's records by sampling transactions, confirming balances with banks and customers, observing inventory counts and reviewing management's estimates. They cannot check every entry, so an audit gives reasonable assurance, not a guarantee, that the statements are free of material misstatement.
Auditors of US public companies must be registered with the Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act of 2002 after the Enron and WorldCom scandals. The PCAOB sets audit standards and inspects audit firms. Most large companies are audited by one of the "Big Four": Deloitte, PwC, EY and KPMG.
Reading the opinion
- Unqualified (clean) opinion: the statements are fairly presented. This is the normal result.
- Qualified opinion: fairly presented except for a specific issue.
- Adverse opinion: the statements are materially misstated.
- Disclaimer: the auditor could not gather enough evidence to form an opinion.
Larger companies also receive an auditor's attestation on their internal controls over financial reporting. Watch for a change of auditor, a restatement or a reported material weakness; none proves wrongdoing, but each deserves a closer read.