Auditors Consideration of Corporate Governance

Abstract

In modern business world, companies need to attract a large number of shareholders because of the large amount of required capital. In these companies, shareholders hire managers to direct the firm and make decisions on behalf of them because they cannot have a full control over the firm’s activities. Therefore, managers have the competitive advantage of information within the firm rather than the shareholders which leads to asymmetry of information between managers and shareholders. In addition, agency theory assumes an opportunistic behavior that managers want to maximize their own expected interest disregard of shareholders right. In other words, managers may not necessarily make decisions in the best interests of shareholders because of conflict of interest and hence impose the agency costs on the firm. Agency theory suggests that corporate governance (CG) as an effective information system can monitor the management and align the interests of executives with those of shareholders to mitigate the agency costs. In addition, auditors must work with other factors in CG structure to ensure that stakeholders receive the highest quality of financial reports as well as help to protect the interests of stakeholders. Since CG and external audit services are complementary and the purpose of both is to protect stakeholders' interest this study aims to explore the perceptions of professional auditors on the consideration of CG in an audit engagement. Applying a semi-structured interview with two certified public accountants (CPA), this study obtains the opinion of experts how to consider CG in their efforts. Analyzing of interviewees’ response suggests that auditors consider CG mechanism as a system of supervision to control the opportunistic behavior of individuals and monitor the financial reporting process. They use CG information in planning stage more than other stages to define the extent of efforts for audit process. Weaker CG mechanism increases the control risk and required auditors to make more efforts in their audits. Among different aspects of CG the board of directors is more considered by auditors. They believe that audit committee is an important mechanism in CG but board of directors affects it and hence board of directors has the most power to make decisions regarding financial reporting quality. Other characteristic of CG mechanism which can be considered by auditors is ownership structure and compensation committee.

Keywords: corporate governance, board of directors, audit committee, audit, auditors

JEL Classification: G34, M41