Role of Auditors in Corporate Governance
8 Pages Posted: 14 Oct 2009
Date Written: October 11, 2009
Corporate governance loosely refers to the whole system of rights, processes and controls established internally and externally over the management of a business entity with the objective of protecting the interests of its stakeholders. At the most elementary level, it can be described as the processes by which investors and stakeholders attempt to minimize the transaction costs and agency costs associated with doing business within a company. To do so the principal prerequisite is to have a clear, transparent, concise and true picture of the company’s financial affairs. This has been achieved by the process of auditing, however willful or inadvertent negligence in auditing process has led to disastrous consequences. Much before Satyam scam shook the Indian corporate sector, the world had its share of breakdown of corporate governance in form of Enron, Parmalat, Qwest, Global Crossing etc. all from auditing lacunae which shook the very fundamentals of corporate governance. Hence auditing has an important place in the hierarchy of ideal corporate governance structure. This paper will focus on role of auditors in corporate governance with the central theme of ‘Quis custodiet ipsos custodes?’ or ‘who will guard the guards’, thereby delving into issues relating to duties of auditors, independence of auditors, liability of auditors, analyzing and comparing corporate scandals which took advantage of poor accounting standards and disclosure requirements. Specifically, the researchers will study the mode of appointment, remuneration, scope of activities and term of external auditors, as well as their liabilities in case of failure in discharge of duties, since these aspects of an auditor’s status are most closely related to their independence and function they play in a corporate governance framework of fair disclosure of financial accounts. Quite in consonance with the Irani Committee Report and the advisory by National Advisory Committee on Accounting Standards (NACAS) the researchers would argue that to make auditing even more transparent and independent interested parties not directly connected with the day to day management of the company like the representatives of shareholders, creditors etc. should be part of the auditing team, remuneration and appointment of auditors in any company should be scrutinized in an extraordinary general meeting and not just in Annual General Meeting, outsourcing of audit related work by reputed auditing firm should be firmly disallowed, a mandatory gap between re-appointment of auditors should be enforced. In lines of Naresh Chandra Committee Report and the recommendation of ICAI the researcher would further suggest that auditors be prohibited from performing certain non-audit services, blacklisting of auditors who are found guilty of dereliction of duty. Further the law courts are to be urged to consider that auditors owe a fiduciary duty towards the company and thus will be liable for breach of such fiduciary duty for fraudulent misrepresentation and not just institutional repercussion in form of blacklisting etc. by ICAI, there has to be a healthy debate to ensure that no veil of standard of care and skill obscure the duties of auditors, the researchers would like to draw a parallel between professionals in medical and auditing sector and show that courts have diverged on the standard of skill required, this is a disturbing trend as the statutory duty of care is same in both the cases. The researchers would conclude by a critique of the proposed superstructure in auditing field, the notion has been an unsuccessful attempt in USA, a micro supervision would be much effective and fruitful with representatives from interested groups like shareholders etc. but from a different company in different field working in tandem in a loose advisory role with the auditors group is bound to check any mis-alliance between management and auditors.
Keywords: corporate governance, duties of auditors, independence of auditors, liability of auditors, accounting standards and disclosure requirements, Naresh Chandra Committee Report, Irani Committee Report, ICAI, NACAS
JEL Classification: K00, G34
Suggested Citation: Suggested Citation