Reasons for Audit

Cooperatives March 08, 2011 Print Friendly and PDF

Authors: Phil Kenkel, Oklahoma State University,, and Bill Fitzwater,
Oklahoma State University

Securing an annual audit of the cooperative’s financial records is the responsibility of the board of directors. Because the board acts as the trustee of the cooperative’s assets, it is responsible for safeguarding, auditing, and appraising the cooperative’s financial resources. The audit is a fundamental part of this trustee responsibility, and the cost of the audit should be considered a normal business expense.

The fiduciary responsibilities of the board should not be taken lightly. If a board of directors is negligent in establishing and monitoring the operations of their cooperative, directors could be held liable. The first step in fulfilling this obligation is a complete, double-entry bookkeeping system; second is monthly financial statements; and the third is an annual audit of the accounting records and supporting document.

The fiduciary/trustee responsibility of the board of directors translates into five specific reasons why the board must provide for an annual audit of the cooperative’s accounting records:

  1. Prevent deliberate misstatement of fact. Misstatement of fact may occur for many reasons, such as to hide poor decisions or to cover fraud.
  2. Ensure the judgment decisions are not unduly biased in favor of management. It is the board’s duty to develop and implement the accounting system, and management’s duty to maintain the books.
  3. Ensure records are dependable. Accounting methods should be accurate as well as consistent. An audit will identify shortcomings in accuracy and/or consistency. Procedures lacking consistency fail to be dependable for purposes of analysis and decision making.
  4. Ensure generally accepted accounting principles (GAAP) have been consistently followed. The American Institute of Certified Public Accountants (AICPA) has set guidelines, laws or rules in accounting practices to prepare financial statements. This will allow comparisons with organizations whose audits also follow standard practices.
  5. Ensure that the disclosure is complete. In many cases, what is not reported is often more important than what is reported. An audit will help the board of directors ensure that full disclosure of the financial well being of the cooperative business has been made.

There are other reasons why an audit may be required. Creditors and suppliers may require an audit before credit is granted and have an ongoing audit requirement as part of the loan agreements.

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.