Introduction

For an introduction to Topic 1 watch “What Is Auditing and Why Does It Matter?”:

What Is Auditing and Why Does It Matter? (0:55)

According to a 2011 survey,1 publicly held companies paid their external auditors, on average, $3.9 million in fees to perform audits of their financial statements for the 2011 fiscal year. Data from reports filed with the SEC indicates that the world’s largest four accounting firms (the Big 4) earned more than $12 billion in audit fees—just from publicly held companies—for their audits of fiscal year 2011 financial statements2. Why would these companies pay their auditors such large amounts of money each year? And what are the companies paying the auditors to do?

The short answer is two-fold: First, federal law requires these companies to have an annual audit of their financial statements. Second, because auditors improve the quality and credibility of these companies’ financial information, the companies are willing to pay substantial audit fees because the increased perception of credibility for their financial statements means that investors, lenders, and other interested parties are more likely to engage in transactions with the company. This topic discusses in greater depth what auditors do, our society’s need for auditors, and the roles they play in improving the quality of information.