The Primary Role Of A Company Auditor Accounting Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.


It is a widely accepted view that economic organizations have been set up with a vision towards enhancing the value attributable to risk capital invested by various stakeholders. It was not difficult to meet such expectations when people who actually owned the organisation were the ones who managed its business operations. In comparison, today a few small segments of companies are being managed by their owners. When ownership and management get separated, what comes to the forefront is the issue of how owners and managers are related to each other. This situation leads to a scenario where directors and managers might possibly be in a position to accord greater priority to their individual interests than those of the shareholders. Jassim (1988)

As per the Stakeholder Theory, it is suggested that managers should base their decisions on the interests of the entire segments of people who are interested in the firm. It has been stated that leadership finds its existence only in relationships and eventually what matters is how what the parties engaged imagine and feel about the situation. The recent corporate scandals that have surfaced have shown that boards have not been able to discharge their responsibilities in terms of the corporate control function. Bolman and Deal (1997:294)

Corporate Governance is an internationally debated interdisciplinary concept with many characteristics (Nobel, 1998). Notably, corporate governance is a key factor for institutional investors in deciding whether to invest in any company (McKinsey & Co, 2002). The concept comes into prominence because of the diversion between ownership and management, as discussed above.

However, the concern is whether in the context of corporate governance, auditors play an important role Furthermore; corporate governance mechanisms have a positive effect on the issue of accountability (Dewing & O'Russell, 2004). Thus come into play the multifaceted role an auditor can play in the functioning of a company. The ethical considerations come into play in this in a major way.

Contribution of Auditors to the corporate governance process

Auditors examine company's accounts and report to the company on the accounts. Fundamentally, the concern is how auditors carry out these duties effectively. Hugh L Marshall and Thomas E Powell have defined the role of auditors in an apt manner. "It would a misconception to believe that the possibility of fraud is the only reason for establishing a chartered accountant committee. While the primary role is to oversee the management's financial and reporting responsibilities, it is just one task.

Auditors are empowered with a wide range of functional responsibilities in order to detect wrongdoings by the management. They are expected to be independent of the company and report on the company objectively. In fact, auditors can only play their role effectively if they are independent. The auditors are able to remove management's biasness as regards to the presentation of the company's financial information. They can report to what extent the company practices corporate governance. They are expected to play a significant role in maintaining good corporate governance (Ali, 1999). They must ensure that good corporate governance practices are adopted (Anandarajah, 2001). They must act as the guardian of the company's financial integrity.

This is because an effective and objective audit is an essential part of corporate governance (Low, 2002). This is to ensure that the legal position is in tandem with international standards in the realm of corporate governance. Thus, it was correctly stated in Simonius Vischer & Co v Holt (1979) that that the duty is extended to checking the conduct of any servant or director of the company.

Auditors through playing a supervisory role in the audit committees and an effective internal control system play a crucial role to not only minimise financial, operational and compliance risks, but also "enhance the quality of financial reporting." As well as playing a fundamental role in transmitting financial results to the general public, the auditors play the role of a watchdog , serving as a representative of shareholder interests and facilitate the process whereby management, external auditors and the chief executive can be questioned and held to account - if need be. The auditors are responsible for monitoring the financial reporting process, but also the effectiveness of the company's internal controls, the internal audit - where applicable, and risk management systems. It is also assigned with the task of monitoring the statutory audit of the annual and consolidated accounts.

Case Illustration on the Role of Ethics in Auditing

Enron, the Texas based energy trading company is the first scandal which shook up the auditing profession in recent times. Enron has caused a crisis to the confidence in auditors (Worden, 2002) and the reliability of financial reporting (Holm & Laursen, 2007).

The audit quality and the independence of the auditors were questionable (Davis, 2002). This is because of the following:

The auditors, who were Arthur Andersen, were not only receiving fees for auditing but for non-audit services too i.e. for consultancy services. In 2001, Arthur Andersen earned US$55 million for non-audit services (Brown, 2005). There were regular exchanges of employees within Enron from Arthur Andersen.

It was reported that in 2000, the 'Big Four' earn 50% of their income from management and consulting field which was only 13% in 1981 (Securities & Exchanges Commission, 2000). There is also evidence that revenue from other services has been increasing (Palmrose, 1986). In such a case, the auditors have put themselves in a position where there is conflict of interests. The independence of the auditors has been compromised due to the close relationship between the company's management and the auditors. This is because the company's management has decided to engage the auditors for non-audit services. This close relationship has been termed as 'familiarity threat' (Hussey, 1999).

Although Arthur Andersen was making a report on the company's accounts, they did not report fraud to the stockholders and stakeholders. This is because the fraud was committed by the management. Kenneth Lay took home US$152 million although the company was facing a loss.

In view of the If the auditors were to report they probably will not be appointed in subsequent years or be engaged for non-audit services. They made sure that they were in the management's good books. They maintained confidentiality but for the wrong reasons and thus compromised on the ethical considerations in the discharge of their functional responsibilities.


Company is the most popular form of business entity today as compared to sole traders and partnerships. Each decade passes with more and more companies being formed to do businesses. A company is able to raise capital for its operational needs. However, it is important that the capital raised by a company is used for lawful purposes. To ensure this, auditors are under a duty to audit the company. Nevertheless, if the duties and obligations of auditors are minimal, eventually, the use of a company will be misused. Simultaneously, businesses are also collapsing whereby it affects the rights and interests of the stockholders and stakeholders. Since such is the magnitude on the importance of auditors, equal importance should be placed on the duties and obligations of auditors. An audit provides a high level of assurance about an accountability matter which is expressed as reasonable assurance. Otherwise the information contained in the report would be lost and misleading. The duties and obligations of auditors must be expanded for the sake of capital market, stability of financial and economic sector and the rights and interests of stockholders and stakeholders. A higher audit quality will provide better information to them. There must be a modern approach to the auditors' duties and obligations in the context of corporate governance

(1304 words)