The Role of External Auditor
External auditors according to Krishnamoorthy (2002) are responsible for ensuring that the financial reports of the client are done and presented in a factual way. Therefore, they must investigate the effectiveness and whether internal audit is done in accordance to the laws and regulations set by the government and other governing bodies. The external auditors must understand the process of auditing done in the client organization and present an independent report whether they think the process is appropriate and the results factual. External auditing is important because it ensures that the company’s financial reports are appropriate and factual. The external auditor has a role to increase the reliability and credibility of an organization's auditing process.. The Securities Exchange Act of 1934 in the of the United States set the requirements that companies that offer stock to the public in raising capital must have their financial statements audited by an independent public accountant. Thus, the auditor’s role in corporate governance and the financial reporting process is to provide independent assurance to shareholders regarding fair presentation, in all material respect, of the company’s financial statements.
Before the establishment of the Sarbanes-Oxley Act of 2002, the auditing profession was mainly a self-regulated profession where peer review is the primary method which enables auditors to assess audit quality. Because of this, external auditors were subject to business pressures, the desire for larger fees and profit margins, and the influence of paying clients who wanted certain accounting treatment ad tax results. For example in the case of Enron, the roles of external auditors became a big issue. One of the most notorious corporate governance cases is one that involved Enron, named as one of the most remarkable bankruptcies in the United States. In 2001, the company, one of the top ten biggest corporations in the United States went bankrupt. The reason for the company’s bankruptcy was fraudulent accounting (Hake 2005, p.595). Corporate governance came into the limelight, as inquiries regarding the case of Enron revealed that failure in corporate governance is the reason for the bankruptcy of Enron. There were, according to reports, a number of Senior Executives in the company that acted for their own benefits and profited through secret deals. The Board seemed to be unable to take action to control the destructive behavior and seemed to withheld information regarding the finances of the company. Reports about suspicious activities inside the company were also ignored by the Board (Sparkes 2002, p. 224).
It is clear that in the case of Enron, independence of external auditors were jeopardized and there were no one to investigate and report on the auditing process of Enron.
The establishment of Sarbanes-Oxley Act (2002) sought to improve the accounting profession. There are three ways by which the said act changed the auditing profession:
1. It paved the way for the creation of an oversight board responsible for regulating the auditing profession.
2. It connected the audit function to the corporate governance structure.
3. It requires the audit committee to take the responsibility of recruiting, paying and terminating external auditors. Additionally, the audit committee is responsible for overseeing their work, monitoring their independence, and avoiding actual or potential conflict of interest situations (Rezaee, 2007).
Legislations like the Sarbanes-Oxley, considered as a landmark legislation with impacts on corporate governance and presentation of financial information are adding new or different responsibilities for both the company and the auditor. External auditors consider business risks in analyzing the financial data of organizations. The following are examples of business risk considerations that the external auditor may consider with regard to the audit process, including discussions with management and audit committee.
Strategic Analysis
Identify critical elements of the business environment that may impact financial reporting and the audit strategy.
Business Process Analysis
Acquire an in-depth understanding of the business processes supporting the strategy in order to obtain a more detailed understanding of how the business operates and to determine what criteria or measurements are used to gauge company performance against objectives.
Risk Identification and Assessment
Once critical strategies and supporting processes are understood and mapped, the auditor should interact with members of management to elucidate the primary risks that could threaten attainment of the business goals. The auditor consider how management is addressing and controlling risks in developing their audit strategy and plan.
Business Measurement
Focus on the processes and variables that have the greatest impact on the financial results. These processes could consist of product, customer service, credit delivery, or others. These measurements may be compared to financial risks, benchmark data, or other appropriate measures to see what gaps are revealed.
Substantive Audit Procedures
Perform substantive audit procedures to obtain audit evidence as whether the assertions in the financial statements that relate to certain identified risks are free of material misstatement. As part of performing these procedures, the auditor may obtain direct or indirect evidence about management’s responses to identified risks (McCarthy et al, 2004).
Corporate Governance at Citic Pacific
Citic Pacific commits itself in making sure that the highest standards of corporate governance are followed. It is the belief of the Board that good corporate governance increases the confidence of investors and is favorable to the image of the organization. Citic Pacific complies with the Code of Corporate Governance Practices that are followed by public listed organizations in the Hong Kong Stock Exchange. The Audit Committee was instituted in 1995. The role of the audit committee is to ensure that the organization employs the appropriate procedures in internal control. The audit committee is also responsible for making sure that the company complies with the policies and regulations in financial reporting and auditing. Part of the company’s commitment to meet its external financial reporting obligations is the commissioning of an independent auditing firm – PricewaterhouseCoopers (PwC). The audit committee is the one responsible for dealing with external auditors. The audit committee discusses matters with the external auditors and make sure that they are independent. It is also the role of the audit committee to acquaint and discuss with the external auditors their roles and responsibilities and the scope of their jobs. The audit committee reviews the findings of the external auditors and present their findings to the Board. Both the internal and external auditing processes are monitored by the audit committee. The Audit Committee is the one that commissioned the independent external auditors and is the one that makes sure that they are independent and their reviews and investigations are done in accordance to the guidelines set by the company. The external auditors’ report is included in the financial statement of the company which is presented to the Board, the shareholder, investors and the general public. This is done to guarantee that the financial reports are factual. To create a holistic review of the finances of the company, the external auditors need to coordinate with the Directors These Directors are the ones who prepare and present the combined reports in observance of the policies set the Hong Kong Institute of Certified Public Accountants. The main responsibility of external auditors in Citic Pacific provide their views and opinions of the combined reports, whether the information tally with their own findings. The independent external auditor has the responsibility to report to the company and the Board. It is the responsibility of the independent external auditors to ensure that their auditing process is done in accordance to the standards provided by the Hong Kong Institute of Certified Public Accountants. The auditors need to ensure that the reports presented by the company are not misstated and that there are no irregularities with the process and results of accounting and auditing. The auditors are also entitled to employ their chosen procedures for accumulating information and evidences. Misstatements are the primary concerns of the auditors – they need to ensure that no misstatement will occur.
Corporate Governance at CLP
Corporate Governance is an important process. Corporate Governance serves as a guide for the company in reviewing their principles and practices. The company ensures that its businesses and every aspect of its operations is ethical and is in accordance with the guidelines set by different governing bodies. CLP endeavors to be transparent to every interested party. The company believes that good corporate governance enhances credibility and increases shareholder value.
The Audit Committee oversees both internal audit and external audit. The audit committee is composed of entirely independent non-executive directors with the Chairman having appropriate professional qualification and experience in financial matters. The audit committee has specific written terms of reference which have been prepared by reference to “A Guide for Effective Audit Committees” published by the Hong Kong Institute of Certified Public Accountants. The terms of reference include the following duties in line with the Stock Exchange Code and taking into account the requirements of the US Sarbanes-Oxley Act. As the overseeing body for external audit, the Auditing Committee is responsible for appointing, retaining, dismissing and replacing the Group’s External Auditors, subject to endorsement by the Board and final approval and authorization by the Shareholders of the company in general meeting, and to approve the remuneration and terms of engagement of the External Auditors, and any questions of resignation or dismissal of that auditor. The audit committee also acts as the key representative body for overseeing the company’s relations with the external auditors. The audit committee is required to meet with the external auditors at least annually, in the absence of management, to discuss matters relating to its audit fees, any issues arising from the audit and any accounting, financial reporting or internal control matters the auditors may wish to raise.
The external auditors are the ones who are responsible for coming up with an autonomous opinion whether the financial reports of the company are factual. Their opinion must be based on their independent audit. The financial reports of the company must also be reviewed. Based on the gathered data of the external auditors and the result of their independent audit, they will then form a report to be presented to the shareholders. The report of the external auditors are places in the Annual report of the company. Ensuring that the external auditors are independent and impartial is a corporate governance commitment of the company. There are many existing regulations and government policies that aim to ensure external audit autonomy. CLP instituted different policies in order to make sure that independence of external audit remains intact and minimize any perceptions that such independence has been jeopardize in any way. Part of these policies concerns the company’s auditing firm’s former partners. The company’s policy regarding former partners is that the former partners of the company’s present auditing firm must not be allowed to work in the company, more so to work in the audit committee. The external auditor’s former partners must also not be allowed to have any financial stake or interest in the company and its businesses. The Board appointed the audit committee to be in charge in monitoring the external audit process and ensuring external auditors’ autonomy. External auditors must not be appointed to undertake non-audit task unless given permission by the auditing committee. Non-audit works performed by external auditors must contribute to the company and at the same time they must not jeopardize the autonomy of the external auditors. The audit committee will also be the one responsible for setting pay for non-audit tasks for external auditors.
Comparisons
In terms of policies and procedures in corporate governance, both companies follow the same basic principles. There are different corporate governance laws and regulations in Hong Kong that both companies comply with. However, CLP also takes into consideration the Sarbanes-Oxley Act in corporate governance, accounting and auditing. Both companies pay considerable attention is making sure that external auditors are appointed in accordance with the policies set by governing bodies. Both companies have a clear rules and policies in terms of appointment of external auditors. Both companies have an Audit Committee which are responsible for monitoring and overseeing the internal and external auditing processes. The roles and responsibilities of the external auditors in CLP and Citic Pacific are well identified as well as their connections with the members of the company. Both companies ensure that external auditors act independently and takes every step in maintain their independence.
Conclusion
External auditors play an important role in corporate governance today. The elevated importance of external auditors was due to the development in the corporate governance in many nations around the world. Partly, the increase in importance of the external auditors was paved by the different corporate governance crimes and financial report misrepresentations committed by different companies before. Due to these crimes and misrepresentations, external auditors were appointed as independent reviewers of financial reports and information and guards in ensuring that financial reports that companies publish are factual and free of error.
References
McCarthy et al, 2004, Risk from CEO and board perspective, McGraw-Hill, New York.
Rezaee, Z 2007, Corporate governance post-Sarbanes-Oxley: Regulations, requirements, and integrated processes.
Krishnamoorthy, G 2002, “A multistage approach to external auditor’s evaluation of the internal audit function”, Auditing: A Journal of Practice and Theory, vol. 21, no. 1, pp. 95+.
Credit:ivythesis.typepad.com
0 comments:
Post a Comment