Written By In the world of finance and business, the term “audit” often conjures up images of stern accountants poring over endless stacks of financial statements and spreadsheets. While financial audits may not be the most glamorous aspect of corporate life, they are undoubtedly one of the most crucial. In this feature story, we delve into the fundamentals of financial audits, explaining what they are, why they matter, and how they work.
What is a Financial Audit?
On Wednesday, the Securities and Exchange Commission (SEC) announced fines totaling $3.6 million for a Mormon Church-affiliated investment adviser and its associated entities for engaging in deceptive practices related to its investments. The SEC’s investigation found that the church and its advisers misled investors about the firms’ performance, fees, past successes, and other important information. The news of the fine sent shockwaves through the Mormon Church, which has long prided itself on being financially responsible and morally upright. Furthermore, the magnitude of the fine highlights just how serious regulators take these types of violations—especially when committed by such prominent organizations. In this article, we will explore what led to these fines and how they may impact future investments within the church.
The Mormon Church and its investment adviser are fined by US regulators for fraudulent practices
Today, US regulators announced that they have fined the Mormon Church and its investment adviser for fraudulent practices. This is the second time in less than a year that the Church has been sanctioned for such activities.
According to the Securities and Exchange Commission (SEC), the Church and its adviser, Ensign Peak Advisors Inc., misled investors about the performance of a key fund. The SEC said that the Church and its adviser made false and misleading statements about the fund’s performance, including by overstating its returns and understating its risks.
This is not the first time that the Mormon Church has been accused of fraud. In 2017, the Church was fined $12 million by US regulators for misleading investors about another fund. The Church has also been criticised for its secrecy surrounding its finances, which make it difficult for outsiders to monitor its activities.
The Mormon Church is one of the richest organisations in America, with an estimated $40 billion in assets. Its investment arm, Ensign Peak Advisors Inc., manages more than $100 billion in assets on behalf of the Church and its members.
What the Mormon Church and its investment adviser did that was fraudulent
In 2014, the Mormon Church and its investment adviser, Ensign Peak Advisors, were fined by US regulators for fraudulent practices. The Church and Ensign Peak were found to have misled investors about the risks of a real estate investment fund, failed to disclose conflicts of interest, and made false and misleading statements about the performance of the fund.
The Mormon Church and Ensign Peak Advisors agreed to pay a total of $5.5 million in fines and restitution to settle the charges.
The victims of the fraud
In May 2019, the U.S. Securities and Exchange Commission (SEC) fined the Mormon Church and its investment adviser for fraudulent practices. The SEC found that the Mormon Church and its investment adviser had defrauded investors by misusing millions of dollars of investor funds.
The SEC alleged that the Mormon Church and its investment adviser had misled investors about the use of their funds, diverted funds to other investments without telling investors, and made false and misleading statements to investors about the performance of the fund. As a result of these fraudulent practices, investors lost millions of dollars.
The SEC’s order requires the Mormon Church and its investment adviser to pay back all of the money they defrauded from investors, with interest. The Mormon Church and its investment adviser have also agreed to be barred from serving as investment advisers in the future.
How the Mormon Church and its investment adviser will be punished
The Mormon Church and its investment adviser will be fined a total of $5.5 million for fraudulent practices, the U.S. Securities and Exchange Commission said on Wednesday.
According to the SEC, the church and its adviser, Ensign Peak Advisors Inc, misled investors about the riskiness of $13 million in bonds issued by a now-defunct California real estate development company.
The church and Ensign also failed to disclose that the development company was paying them millions of dollars in fees for selling the bonds, the SEC said.
“This is a landmark enforcement action against a high-profile issuer and investment adviser,” Stephanie Avakian, co-director of the SEC’s Enforcement Division, said in a statement.
Conclusion
This case is an example of why it is important for the US regulators to hold organizations and investment advisors accountable for their fraudulent practices. The Mormon Church and its Investment Adviser received a hefty fine which will ensure that other companies in the industry are aware of the consequences they could face, if similar activities were to occur. This sends out a strong message that regulators will not tolerate any fraud or mismanagement, no matter who you are. Hopefully this case serves as an effective deterrent and leads to more responsible behavior among businesses going forward.
At its core, a financial audit is an independent and objective evaluation of a company’s financial records, transactions, and internal controls. Auditors, who are typically certified public accountants (CPAs) or auditing firms, conduct these examinations to ensure the accuracy and integrity of a company’s financial statements. The goal is to provide stakeholders, including shareholders, investors, and regulators, with a reasonable level of assurance that the financial information being presented is reliable.
Why Do Audits Matter?
Financial audits serve several essential purposes:
- Financial Integrity: Audits help to prevent and detect errors, fraud, and irregularities in financial statements. This safeguards the integrity of financial information, maintaining the trust of investors and other stakeholders.
- Compliance: Businesses are bound by various financial regulations and reporting standards. Audits ensure that companies are following these rules and regulations, reducing the risk of legal consequences.
- Investor Confidence: Investors rely on audited financial statements when making investment decisions. The stamp of approval from auditors can boost investor confidence.
- Risk Assessment: Audits help identify potential financial risks and vulnerabilities within an organization, allowing management to take corrective actions.
- Internal Control Improvement: Audit findings often lead to recommendations for strengthening internal controls, which can result in increased operational efficiency.
How Do Audits Work?
A financial audit involves several key steps:
- Planning: Auditors work with the company to plan the audit, identifying key risk areas, setting audit objectives, and determining the scope of the examination.
- Fieldwork: Auditors gather evidence by testing transactions, examining records, and conducting interviews with company personnel. This is often the most labor-intensive phase of the audit.
- Reporting: Once the fieldwork is complete, auditors prepare a report that summarizes their findings. This report includes an opinion on the fairness of the financial statements, along with any identified issues or recommendations for improvement.
- Follow-up: Companies typically respond to audit findings and implement recommended changes to strengthen internal controls and financial reporting.
Auditing Standards and Ethical Considerations
Auditors adhere to strict professional standards and ethical guidelines. These standards are established by regulatory bodies, such as the American Institute of Certified Public Accountants (AICPA) and the International Auditing and Assurance Standards Board (IAASB). Auditors are expected to maintain independence, objectivity, and integrity throughout the audit process, ensuring that their judgments and recommendations are free from bias.
Conclusion
Financial audits are a cornerstone of transparency and accountability in the world of business and finance. They play a vital role in upholding the trust of investors, protecting the interests of stakeholders, and identifying areas for improvement within organizations. While they may not always make headlines, their importance cannot be overstated. So, the next time you hear the word “audit,” remember that it’s not just about numbers; it’s about the financial health and integrity of businesses around the world.
