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An audit is any examination designed to identify problems or areas for improvement. The phases of auditing usually consist of: planning and preparing for the audit, execution of the audit plan, reporting the audit results and closing out of corrective actions. The purpose of audits is to detect problems in the organization or organization’s system earlier, before they get too severe. It is also a tool for continuous improvement, which is the goal of any well-meaning individual, business or organization.

There are three types of audits:

  1. Internal – first party or self-audit
  2. External – second party audit
  3. Independent – third party audit (another organization is involved)

Auditing may also be specifically defined as an independent and objective examination of the final accounts of a business. In the case of financial audits, it is for the purpose of determining whether the balance sheet and profit and loss accounts present fairly the financial position of the business and results of operations.

The biggest auditing firms in the world are called The Big 4 Auditors.

Big 4 Auditors

This group was earlier known as the “Big Eight”, and was reduced to the “Big Five” by a series of mergers. The Big Five became the Big Four after a fifth large auditor, Arthur Andersen, collapsed in the wake of the Enron scandal in 2002.

Under orders from Congress, the Government Accountability Office (GAO) surveyed large companies to determine whether having fewer auditors affected the market. The report, published in 2003, found that most large U.S. companies will not even consider hiring an auditor from outside the ranks of the Big 4, but most said they would prefer having more than four.

The Big 4 audits 98 percent of U.S. companies with annual revenues over $1 billion.

The following are their revenues for fiscal year 2008:

Pricewaterhouse Coopers – $29.2bn revenue

Deloitte Touche Tohmatsu – $27.4bn revenue

Ernst & Young – $24.5bn revenue

KPMG – $22.7bn revenue

None of the Big Four accounting firms stand alone—each is a network of firms that is owned and managed independently. Each of these firms entered into agreements with other member firms in the network to share a common name, brand and standards of quality. Each network has established an entity to coordinate the activities of the firms.

In most cases, each member firm operates in a single country, and is structured to comply with the regulatory environment in that country.

Further reading: Corporate Governance | Audit | Performance Improvement

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