60. Audit (definition)

OK let’s get it out of the way: to audit something basically means to double and maybe triple check if it’s accurate. Now that we have that out of the way, shareholders and potentially lots of other people, depending on your sector, learn about how your corporation is performing by reading about your financial performance in something called “financial statements.” Ground-Up Governance can pretty confidently state that it is not interested in exploring or defining the nuts and bolts of financial statements. There are lots of better places to learn about that. So why even mention financial statements? Well, since financial statements are how people learn about your corporation’s performance, it’s really *really* important for them to be accurate.

Financial performance is just one of lots and lots of things that can and should be measured while your corporation goes about doing the stuff that it does. Remember those tarantula handling objectives? Well, you probably thought they were important, or else why have them in the first place? Since the objectives are important, so is measuring whether or not you're meeting the objectives. If your goal was to handle 1 million tarantulas and you handled 999,999, then you’re probably in good shape. On the other hand, if you only handled 354, then it’s going to be really important to be able to figure out what went wrong – both so you can start doing better, and so that you can explain yourself to your employees, shareholders, and other stakeholders.

Back to financial statements for a second. There are lots of steps that go into making sure they are accurate, like 1) being smart about tracking how your corporation makes and spends money, and how much money it makes and spends, 2) hiring smart people who are good at making and maintaining financial statements, 3) hiring even more people who are really good at reviewing financial statements to make sure they are accurate. The thing that these last people do is called “auditing” the financial statements. There are other applications for the word “audit” but when Ground-Up Governance refers to “auditing” this is what it means: carefully making sure that you’ve accurately measured important stuff that goes on in your corporation.

People who audit financial statements are called “auditors.” Usually, big corporations will hire other big corporations – ones that specialize in auditing financial statements – to audit their financial statements, which helps to make sure that the process is independent (meaning there are no shenanigans going on).

Because boards are responsible for everything that happens in a corporation, it’s also pretty important for them to have a good grasp on auditing. Usually they do that by recruiting one or two professional auditors to the board, and also by building an audit committee, which is 100% exactly what it sounds like. Depending on the corporation, the audit committee might audit lots of other things besides financial statements, too.