Where does the Auditor fit in?

Source : Deloitte Report

Internal Investing
Audit Public

Audit Board of Shareholders

Committee Directors

External
Regulators
Auditors
Relationship between the Board and the Auditors
Source : Deloitte Report

Internal Investing
Audit Public

Audit Board of Shareholders

Committee Directors

External
Regulators
Auditors
Relationship between the Audit Committee and the Auditors
Source : Deloitte Report

Internal Investing
Audit Public

Audit Board of Shareholders

Committee Directors

External
Regulators
Auditors
Regulation of Auditors
Source : Deloitte Report

Internal Investing
Audit Public

Audit Board of Shareholders

Committee Directors

External
Regulators
Auditors
 The auditor does not have
direct corporate governance
responsibility but rather
provides a check on the
information aspects of the
governance system.

Auditors must express, to the board,

their view on the appropriateness –
not just the acceptability – of the
accounting principles used or
proposed to be used, and on the
transparency and completeness of
the disclosures.
 The Audit Committee and the Auditors
need to maintain an ongoing dialogue
independent of management and the
rest of the board

Regulators are increasingly taking an interest

in the activities of auditors evidenced by:
 independence and freedom from
conflicts between auditor and auditee
 public inspections of audit firms (quality
control systems within the firm and
appropriateness of audit work) to
enhance public confidence in audits
 Source : Deloitte Report
External Auditor in Corporate Governance

 Corporate governance involves decision making, accountability, and monitoring. check

whether the financial information given to investors is reliable.
Role  To express an expert opinion on the fairness with which financial statements present, in
all material respects
 To be able to express such an opinion, the auditor must examine the financial statements
and supporting records using sound auditing techniques.

Characteristics
 Public accounting firms offer many services to clients.
 Audit provides confidence., reduces uncertainty and risk, adds value.
 Auditing is a Public Responsibility  It involves a public responsibility that
is more important than the employment relationship with the client.

Audit Matters for

Governance Interest
require the auditor to communicate to the audit committee and the board about:
• Approach, scope, limitations of the audit.
• Going concern uncertainties.
• Selection of and changes in accounting policies and practices.
Cost of  Skepticism about the auditors and the • Significant risks and exposures, such as litigation, requiring disclosure.
companies. • Disagreements with management that could affect the financial statements or
accounting and  Litigation against the auditors and the audit report.
audit failures is companies. More communication items:
immense :  The survival of the auditors and the • Audit adjustments that could significantly affect the financial statements.
companies. • Weaknesses in accounting and internal control systems.
 Misallocation of capital to companies • Expected modifications to the auditor’s report.
that don’t deserve it or that should be • Irregularities, fraud, non-compliance with law and regulations.
paying more for it. • Other matters agreed in the terms of the audit engagement.
 The investors and society.
 Institutional Investors, Stock Markets and Other Intermediaries

F
B For companies who are listed in a jurisdiction
other than their jurisdiction of incorporation,
the applicable corporate governance laws
Votes should be
cast by custodians
C and regulations should be clearly disclosed.
In the case of cross listings, the criteria and
or nominees in line
Institutional investors acting procedure for recognising the listing
with the directions
of the beneficial in a fiduciary capacity E requirements of the primary listing should be
should disclose how they transparent and documented.
owner
shares.
of the
manage material conflicts of Insider trading and G
interest that may affect the market manipulation
exercise of key ownership should be prohibited Stock markets should provide
rights regarding their and the applicable fair and efficient price
investments. rules enforced discovery as a means to help
A promote effective corporate
governance
Institutional investors acting in a D
fiduciary capacity should disclose
their corporate governance and The corporate governance framework should The corporate governance framework should
voting policies with respect to require that proxy advisors, analysts, brokers, provide sound incentives throughout the
their investments, including the rating agencies and others that provide investment chain and provide for stock markets to
procedures that they have in place analysis or advice relevant to decisions by function in a way that contributes to good
for deciding on the use of their investors, disclose and minimise conflicts of corporate governance.
voting rights. interest that might compromise the integrity
of their analysis or advice Source : OECD
 Source : ICAEW appoint agents and delegate some decision-
making authority to them

Shareholders BoD
• Information Asymmetries
(Principles) • Agency Problem (Agent)
• Self Interest
Auditors may be risk averse and being • Moral Hazard
conscious of their potential liability,
introduce risk management processes
that result in limitations in the scope
will have their own interests Independence and Objective
of their work and caveats in their
and motives to consider External
reports which principals may find Auditor Regulators
frustrating. Lead to further concerns about trust,
threats to objectivity and independence
Audits serve a vital economic and an ongoing need to find further
purpose and play an important mechanisms such as regulation to align
role in serving the public the interests of shareholders, directors
interest to strengthen and auditors.
Act on behalf of ‘principals’ to ensure that
accountability and reinforce their interests are appropriately heeded
trust and confidence in Auditors are engaged as agents
and there may be more than one
financial reporting. As such, under contract but they are
‘regulatory principal’ e.g. where there are
audits help enhance economic expected to be independent of
regulators of company boards and
prosperity, expanding the the agents who manage the
regulators of auditors.
variety, number and value of operations of the business. The US regulators have developed a
transactions that people are primary purpose of audited critical role in corporate
prepared to enter into accounts in this context is one relationships in the US, e.g. the
Reputation is a key factor in
of accountability and audits introduction of the SEC under
promoting trust and auditor
help to reinforce trust and the 1934 Securities Act to deal
An audit provides an independence is an important
The auditors provide an promote stability.
independent check on the quality that shareholders look with the regulation of securities
independent report to the Auditor independence from
work of agents and of the for. Auditors have an and the 2002 Sarbanes-Oxley
shareholders on the truth the board of directors is of
information provided by important incentive to Act which established the Public
and fairness of the great importance to
an agent, which helps to maintain independence to Company Accounting Oversight
financial statements that shareholders and is seen as
maintain confidence and protect their reputation and Board.
are prepared by the board a key factor in helping to
trust for protecting thereby help them to retain
of directors. deliver audit quality.
shareholders’ interests and win audits.