Audit formation

ng A frequently used tool in strategy evaluation is the audit. Auditing is defined by the American
Accounting Association (AAA) as “a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of correspondence
between these assertions and established criteria, and communicating the results to interested
users.”12 Auditors examine the financial statement of firms to determine whether they have been
prepared according to generally accepted accounting principles (GAAP) and whether they fairly
represent the activities of the firm. Independent auditors use a set of standards called generally
accepted auditing standards (GAAS). Public accounting firms often have a consulting arm that provides
strategy-evaluation services. The SEC in late 2009 charged General Electric with accounting fraud,
specifically for inflating its earnings and revenues in prior years. GE has agreed to pay $50 million to
settle the charges. (Students—when preparing projected financial statements as described in Chapter 8,
do not inflate the numbers.) The new era of international financial reporting standards (IFRS) appears
unstoppable, and businesses need to go ahead and get ready to use IFRS. Many U.S. companies now
report their finances using both the old generally accepted accounting standards (GAAP) and the new
IFRS. “If companies don’t prepare, if they don’t start three years in advance,” warns business professor
Donna Street at the University of Dayton, “they’re going to be in big trouble.” GAAP standards
comprised 25,000 pages, whereas IFRS comprises only 5,000 pages, so in that sense IFRS is less
cumbersome. This accounting switch from GAAP to IFRS in the United States is going to cost businesses
millions of dollars in fees and upgraded software systems and training. U.S. CPAs need to study global
accounting principles intensely, and business schools should go ahead and begin teaching students the
new accounting standards. All companies have the option to use the IFRS procedures in 2011, and then
all companies are required to use IFRS in 2014, unless that timetable is changed. The U.S. Chamber of
Commerce supports the change, saying it will lead to much more cross-border commerce and will help
the United States compete in the world economy. Already the European Union and 113 nations have
adopted or soon plan to use international rules, including Australia, China, India, Mexico, and Canada. So
the United States likely will also adopt IFRS rules on schedule, but this switch could unleash a legal and
regulatory nightmare. The United States lags the rest of the world in global accounting. But a few U.S.
multinational firms already use IFRS for their foreign subsidiaries, such as United Technologies (UT). UT
derives more than 60 percent of its revenues from abroad and is already training its entire staff to use
IFRS. UT has redone its 2007 through 2009 financial statements in the IFRS format. Movement to IFRS
from GAAP encompasses a company’s entire operations, including auditing, oversight, cash
management, taxes, technology, software, investing, acquiring, merging, importing, exporting, pension
planning, and partnering. Switching from GAAP to IFRS i