Why Yearly Financial Audits Are Required by Law

Audits provide critical information about a company’s financial statements. They help to ensure that the reports have been prepared correctly and are free from material misstatement. Financial audits also help to improve the accuracy and reliability of a company’s financial reporting.

The Sarbanes-Oxley Act (SOX) is a law that was enacted in 2002 in response to the Enron scandal. The SOX act requires all public companies to undergo an annual financial audit. The purpose of the SOX act is to protect investors by ensuring the accuracy and transparency of a company’s financial reports. 

According to Pathlock.com, you should implement SOX audits to comply with this standard. An external auditor evaluates the financial statements and management of internal controls during an audit.

What is an Audit? 

An audit examines a company’s financial statements by an independent auditor. The auditor will express an opinion on whether the financial statements are prepared following Generally Accepted Accounting Principles (GAAP). Auditors will also assess the company’s internal controls and express an opinion on their effectiveness.

Why are Financial Audits Important? 

Yearly audits are essential because they help to ensure the accuracy and transparency of a company’s financial reports. Audits also help to improve the internal controls of a company. The SOX act was enacted to protect investors from fraud and mismanagement. 

There are a few reasons why financial audits are so important. First and foremost, audits assure investors that a company’s financial statements are accurate and free from error. This is important because investors need to be confident that the information they base their investment decisions on is correct.

Financial Audit

Another reason why financial audits are important is that they help to ensure the accuracy of a company’s tax return. The IRS takes audits very seriously, and if it finds that a company has made errors on its tax return, it can impose heavy penalties. In some cases, the IRS may even pursue criminal charges. This is why it’s so important for companies to make sure that their financial statements are accurate before they file their taxes.

Finally, financial audits help to ensure the integrity of the markets. If investors cannot trust the accuracy of a company’s financial statements, they will be less likely to invest in that company. This can lead to a decline in the overall value of the markets. Financial audits help prevent this by ensuring that companies provide accurate information to investors.

So why do we need financial audits? Put simply, they help ensure that businesses are honest and transparent in their financial reporting. With the passage of SOX, investors now have greater confidence in the accuracy of corporate financial statements. As a result, they’re more likely to invest in publicly traded companies. 

How To Do a Financial Audit

To do a financial audit, you must select an audit firm, assess the company’s financial statements, and evaluate management’s internal controls.

Select an Audit Firm

The first step in conducting a financial audit is to select an audit firm. The auditor should be independent of the company being audited. The auditor should also have experience in auditing similar companies.

Assess the Financial Statements 

After the auditor has been selected, the next step is to assess the company’s financial statements. The auditor will examine the statements for accuracy and compliance with GAAP. The auditor will also evaluate the company’s internal controls.

Evaluate Management’s Internal Controls 

The last step in conducting a financial audit is to evaluate management’s internal controls. The auditor will express an opinion on whether the controls are effective. Using a platform like Pathlock.com built for SOX compliance, you would rest assured that your internal controls are running smoothly.

What If You Don’t Follow The SOX Act?

The repercussions of not following the SOX act can be severe. Companies that do not comply with the SOX act can face fines and sanctions from the SEC.

Under SOX, companies must maintain accurate records of their financial transactions and disclose any material changes in their financial condition in a timely manner. Companies that fail to comply with SOX can be subject to civil and criminal penalties. 


While financial audits may be seen as a nuisance by some, they’re actually required by law for all publicly traded companies. The Sarbanes-Oxley Act of 2002 (SOX) requires these businesses to have their financial statements independently audited annually.

The purpose of SOX is to protect shareholders and the public from fraudulent activities by corporate executives. Financial audits help ensure that businesses are being honest and transparent in their financial reporting, which ultimately provides investors with greater confidence in the accuracy of corporate financial statements.

also read: https://newstimeusa.com/learn-more-about-tax-audit-defense/