External auditors are usually public accounting firm employees brought in under contract to review the accounting and financial books of a company. This task is performed quarterly and annually, consistent with the reporting cycle for public investment companies. The external auditor is under the fiduciary burden to make sure that the public and shareholders can be comfortable with the reports issued by the subject company. The external auditor's third-party opinion is critical for successful or failed validation.
Process and Approach
External auditors promote corporate governance by making sure the subject company's reports are accurate, true and an appropriately fair reflection of the company's status. In the process, if anything is discovered that looks fraudulent, then it is directed to management. The external auditor should seriously consider stepping away from the review if management ignores the issue or tries to cover it up. But it is not the external auditor's role to be the fraud investigator per se.
The external auditor will examine the subject company to make sure its automated systems, particularly the financial ones, follow internal controls. Issues or questions raised by outside regulatory agencies over the subject company are also fair game for review. Specifically related to publicly-invested companies listed on public markets like the NASDAQ or the Dow, the Sarbanes-Oxley Act spells out specific requirements that external auditors must meet when preparing their review reports and validating company reports.
Pressures on External Auditors
Since the external auditor's reports are the key to measuring the performance of publicly-invested companies, the federal government felt it necessary to protect the independence of external auditors. With the 2002 passage of the Sarbanes-Oxley Act, each affected company has to have an internal audit committee separate from management to be in charge of retaining external auditors. This breaks