'Problem audits' may leave companies vulnerable to financial risk

A recent report published by the International Forum of Independent Audit Regulators (IFIAR) called attention to the fact that "problem audits" may be undermining the health of financial institutions and a wide variety of other types of companies.

The organization surveyed audit regulators in 30 countries regarding the adequacy of audits they have reviewed in recent years and found that more one third were deficient. A deficient audit may not necessarily be indicative of fraudulent accounting practices or specific errors, but the "persistence" of these issues was cited as "a basis for ongoing concerns with audit quality."

As IFIAR vice chair Janine van Diggelen noted, "Investors and other stakeholders need to be able to rely on the auditor's work," and the survey results show that many auditors may be affirming corporations' financial statements even in the absence of definitive evidence that they are accurate.

Particular problems were seen with companies' provision of supporting evidence for fair-value measurements of corporate assets and testing of internal safeguards against errors and fraud. For financial institutions, the deficiencies were most commonly found in firms' accounting of loan-loss reserves, loan write-downs and valuation of securities.

IFIAR chairman Lewis Ferguson called this "a source of serious, serious concern," and "a wake-up call to firms and regulators alike. More must be done to improve the reliability of audit work performed globally on behalf of investors," he added.

Independent auditing is a critical risk management tool for modern businesses, but internal processes and systems are also essential for ensuring financial stability, particularly for companies involved in lending money to consumers. Using loan management software can help mitigate the risk of loss by ensuring that workable amortization schedules are created for each loan.