A financial audit is an external check on a company’s accounting procedures which verifies that financial statement have been compiled usually a generally accepted methodology and are substantially free from error. Usually it will be performed by a specialized accounting firm. In many countries company are required by law to submit accounts and financial statements to the government on an annual basis. There is often also a requirement that those accounts be externally audited.
There is clearly a certain tension between the duty of an external auditing firm to verify the integrity of the accounting process and its desire to go on gaining business from the client company. If an auditing firm consistently and strenuously raised objections to a client’s accounting methods, perhaps its services would no longer be retained. By contrast, if an auditing firm is too easy-going in its approach to account scrutiny, the integrity of the client’s accounts will not truly be guaranteed. In the event of a financial implosion at the company, the reputation of the accounting firm may itself be called into question and it may lose business from other companies for that reason.
Exactly this process occurred following the collapse of the energy company Enron in the United States. The accounting firm Arthur Andersen had been responsible for auditing Enron’s accounts and, following Enron’s bankruptcy, Arthur Andersen suffered a calamitous loss of reputation and business, leading to the disintegration of the company.