When an external auditor examines a company, she must look at the internal workings of the business to evaluate the organization's financial condition. However, that auditor must take into account external influences on a company as well. No company works in a vacuum, and pressures from the outside can affect the financial well-being of the business.
An auditor must evaluate how current economic conditions affect a company. For example, a company's growth may be down, but if the economy is in a recession, this dip in growth may be acceptable. Conversely, in a robust economy, a company that is not experiencing growth may be in worse trouble than if the lack of growth were in a flat economy. The auditor may wish to look into the balance sheet and financial supporting documents to see if the company report has taken this external factor into account.
Social and Cultural Forces
The culture a company operates in can affect it. If the auditor finds that a shift in public tastes is affecting the market share of the company, this must be taken into account when evaluating the company's sales projections. For example, the tobacco industry has experienced a shift in attitudes toward smoking over several decades. An auditor should check to see if the company has factored in social changes in its estimates.
Political, Governmental and Legal Forces
When government begins to crack down on industry practices, the auditor can take this change into account. The auditor may find that one of the biggest sources of income for the company may come from an area that is coming under greater legal restrictions. This could negatively affect that company's revenues in the future. On the other hand, a company that is in an industry that is being deregulated may be positioned for a strong growth period. The auditor's position should be that the company must make realistic projections based on the legal environment.
Many a company got caught in the switch from analog to digital products. Film companies stopped making film and moved into digital imaging. An auditor can take into account changes in technology when evaluating a company. Sales and revenue projections may rely on an existing technology that is changing or being phased out. The auditor would know that the company's outlook and expenditures must consider this changing technology.
Changing demographics can positively or negatively affect a company. For example, if aging baby boomers are seeking luxuries, the auditor can evaluate a luxury products company in that light. If young people no longer like talking on the phone, a phone company auditor can question the company outlook in light of the changing tastes among certain demographic groups.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.