Corporate Governance And The Audit Committee Accounting Essay


The demand of earning increased by publicly traded companies concerned with allegations of financial statement fraud and lack of responsible corporate governance of high-profile companies (e.g. Enron, Global Crossing, WorldCom, Adelphia) has sharpened the ever increasing attention on corporate governance in general and the audit committee in particular. The audit committee's function has evolved over the years and now with recommendations of the Blue Ribbon Committee (BRC, 1999) and the new rules of the Securities and Exchange Commission (SEC, 1999) and organized stock exchanges (e.g. New York Stock Exchange (NYSE), American Stock Exchange (AMEX),National Association of Securities Dealers Automated Quotation NASDAQ), it is viewed as an oversight function of corporate governance, financial reporting process, internal control structure, and audit functions. The Sarbanes-Oxley Act of 2002,also known as ``Public Company Accounting Reform and Investor Protection Act of 2002,'' has expanded the formal responsibilities of audit committees[1]. These expanded responsibilities of audit committees should be specified in both audit committee charters and reports. Yet, until recently, there was not a common view of what an audit committee charter includes, what it should achieve, and whether to include the report by the audit committee in annual reports. The status of the audit committee report has evolved from non existence to voluntarily and now mandatory for publicly traded companies under the SEC jurisdiction in the USA.

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Information Technology (IT) has caused the accounting profession to change at a rapid pace during the last forty years. Indeed, technology is so pervasive in the accounting profession that it would be difficult for many companies to meet their accounting and financial reporting objectives without using technology. As a result, IT audit and control concepts play a very important role in the current business environment. Accordingly, the need for accounting students to understand IT auditing concepts has evolved to a point that warrants required coverage of IT audit concepts in the accounting curriculum.

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The ability to growth of IT is responsible for businesses of all sizes to obtain a competitive advantage have led to a dramatic increase in the use of IT systems to originate process, store and communicate information. Today, the demand of IT employees and IT systems increased in their daily activities. Now the advancement in the IT which has replaced the Traditional paper with Electronic records because it is an efficient use to save the record permanently. In fact, there are few company don't relay on IT to at least some extent to achieve their financial reporting, operating and compliance objectives. As a result, it is found very often to find separately that IT use does not also affect its independent audit.1

The foundations of auditing depend upon the competence, independence, and due professional care which are affect the quality and the value of an audit. In today's environment, it is evident that audit is increasingly digital in nature, which led to competence and due professional care have taken on a new and different character. Competence relates with an auditor's technical ability to discover a material misstatement in the financial statements and is a function of education, training, and experience. Technical ability of an auditor is responsible to collect evidence to support the audit opinion and weigh it in order to determine if the evidence is sufficient and reliable that led to dramatic changes in information technology have changed the very nature of the evidence of transactions and have created a challenge for the audit profession to maintain its competence. The amendment in the use of information technology by business have had a profound effect on accounting and auditing because these records are almost universally recorded, processed, and reported digitally.2

IT control handles the overall controls structure that is conjunction with manual or user control procedures to manage business risk. The idea of audit has been evolved in 21st century as an internal audit department or external auditor needs to be driven by a shared assessment of the entity's business risks used by both financial and IT auditors.3

The U.S. General Accounting Office (GAO) and the National State Auditors Association

(NSAA) published a guide to help state government agencies build the information

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security (IS) audit capabilities and skills that many are lacking in the face of growing

security threats. According to the document, Management Planning Guide for

Information Systems Security Auditing, state agencies' increasing dependence on

information technology and the Internet has revealed them to greater security risks. Yet,

many agencies has a lack of basic information-security plans, policies, controls, and

skills. It is the weakness of state government auditors to Understand technology,

According to a skills-assessment survey of state government audit agencies conducted

by GAO and NSAA in spring 2001. Survey show that, overall, auditor had to face

problem to understand the technologies they audited. In 55 out of 75 technical

categories, more than 40 percent of respondents wanted more training or experience in

those areas of technology.4 as the connectivity increased between the people that is

responsible for the internal auditor to show the more exposure to IT systems than in the

results past. Technology plays a vital role in the field of IT that led to modern

organizations function, and it has become integrated to the degree that virtually every

type of audit requires at least some consideration of IT issues. Whereas technology was

once considered the domain of specialized IT auditors, it is now the concern of all

auditors, including audit generalists.5

E-Business introduces new challenges to conventional external auditors and the audit profession. Therefore, conventional manual audit techniques are the oldest technique to conduct the internal audit that is inadequate for the electronic age. External auditors need to understand how the advanced technology affects their audit process. They also need to acquire the necessary knowledge and skills about this technology to be able to deal with the audit of electronic transactions on a daily basis using continuous audit approaches.6

As the growth of enterprise- wide computing increased that led to face the problems audit of year-end financial statements. Paper trails and control checkpoints that were once standard for an audit firm are now available only in electronic form. If traditional methods of testing controls continue to be used, significant risks may go end up. When we are dealing with advanced information systems, the auditor may not be able to reduce detection risk to an acceptable level by relying solely on substantive tests. Auditing standards require that if the client uses technology to process data the technological infrastructure must be audited. Testing of sophisticated controls including firewalls, encryption of sensitive information, passwords, and authentication of electronic images may be necessary when dealing with electronic evidence.7

IT has had a profound influence on companies and their auditors are in preparing financial statements. Some organization follow the Information Technology for the internal audit while few organizations do not use IT at least to maintain the general ledger, and most entities have automated the process of entering transaction totals and adjustments (including journal entries) into the general ledger and preparing financial statements. In the old days the auditor examine manually prepared cash-receipt journals and check registers, trace monthly totals to handwritten entries in the general ledger (noting erasures or changes) and examine manually prepared worksheets combining general ledger accounts for the first pencil draft of the financial statements.8

Information technology plays an important role in an auditor's assessment of financial reporting controls. It is final requirement of the different institutions to prepare accounting statement especially it required by Sarbanes-Oxley. In the end we wind up the system it is mandatory for the companies to check out their business units from every corner and in order to achieve this purpose they must upgrade their system by using IT dependent, automatic as well as manual, it must develop relation between each and every units. The Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2 states: those companies which are directly linked with information technology can get better internal control and their financial statements would be more accurate. The PCAOB standard incorporates by references auditing standards which discuss the effect of information technology on internal control over financial reporting.

Technology plays an important role in most businesses. Recent regulations have highlighted the importance of IT controls as well as the responsibility to audit such controls. Accordingly, accountants and auditors need to understand IT audit and control concepts.

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The Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2 states: it has been observed in different studies that those companies which are directly linked with information technology give better result and prepare accurate financial statements due to its tight internal control.10 The PCAOB standard incorporates by references auditing standards which discuss the effect of information technology on internal control over financial reporting.11

Technology plays an important role in most businesses. Recent regulations have highlighted the importance of IT controls as well as the responsibility to audit such controls. Accordingly, accountants and auditors need to understand IT audit and control concepts.

Theoretical framework

Corporate Governance is that in which we place the structure, processes and mechanisms by which business and affairs of the company or firm are directed and managed, in order to enhance long term shareholder value through accountability of managers and enhancing firm performance. In other words, through such structure, processes and mechanisms, the well-known agency problem, agency problem occurs because the management of the corporation and owner of the corporation are separated with each other, owners elect board of director and board of directors hires management on behalf of owner - the separation of ownership (by shareholders) and control (by managers) which gives rise to conflict of interests within a firm may be addressed such that the interest of the managers are more aligned with that of shareholders.

In recent years, the corporate scandals, some of which are still unfolding, involving high incidence of improper activities of managers expropriating the resources of a firm at the ultimate expense of shareholders prompt the intense reexamination and scrutiny of some of the existing corporate governance practices and also considerable interest in empirical research on the effectiveness of various corporate governance institutions and mechanisms.

This system plays a vital role in the development of the organizations because it secure the company's financial statements systems, as we know that every organization strives to gain the confidence of its stock holder and to maximize their wealth. If any company is trying to increase its profits and that is the ultimate purpose of every organization then it would positively affect share holders wealth. Through this system organization become successful to attain their purpose and most important thing is that it helps organizations to reduce agency cost. As we know very well that corporation is such type of business organization in which owners of the business has no control over their business, management looks every matter of organization. Sometimes it creates conflicts when shareholders suspect that management is not performing according to their interest and that causes agency costs. But with the emergence of this system, it has reduced this problem at satisfactory level.

If a company is establishing its system using completely IT base and its all controls are checked through that system, it is known as information technology or information system audit. it has been observed in many cases that companies that have applied this system they can easily secure their assets, data can easily be integrated, their efficiency towards operating their business is much more higher. These all facts validate the IT audit system. All functions are carried on by joining accounting statements, internal audit and other important business operations. Another name of information technology audit is automated data processing as well as computer audit. Initially when this concept emerged in the world this concept was know electronic data processing audits.