Audit and Corporate governance issues

audit committee as corporate governance mechanism and audit committees and corporate governance in a developing country
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Dr.KiaraSimpson,United States,Researcher
Published Date:05-07-2017
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AUDITING AND ITS ROLE IN CORPORATE GOVERNANCE Bank for International Settlements Bank for International Settlements FSI Seminar on Corporate Governance for Banks FSI Seminar on Corporate Governance for Banks 20 June 2006 20 June 2006 Derek Broadley Derek Broadley Deloitte Touche Tohmatsu, Hong Kong Deloitte Touche Tohmatsu, Hong Kong 1 ©2005 Deloitte Touche TohmatsuCorporate Governance Defined § International Standard on Auditing (ISA) 260: “Communications of Audit Matters with Those Charged with Governance” § Governance is the term used to describe the role of persons entrusted with the supervision, control, and direction of an entity. § Depending on the jurisdiction, different bodies may have responsibility for corporate governance: § Board of Directors § Audit Committee § Other supervisory committees § ISA 260 requires the auditor to determine those persons that are charged with governance 2 ©2005 Deloitte Touche TohmatsuBenefits of Good Corporate Governance § Most direct benefit is to non- management shareholders. § Ultimate benefit is the more efficient allocation of capital to its most productive uses. 3 ©2005 Deloitte Touche TohmatsuReasons for Corporate Governance Failures § No governance system, no matter how well designed, will fully prevent greedy, dishonest people from putting their personal interests ahead of the interests of the companies they manage. § But many steps can be taken to improve corporate governance and thereby reduce opportunities for accounting fraud. § The auditing profession has an important role to play. 4 ©2005 Deloitte Touche TohmatsuWhere does the auditor fit in? § The auditor does not have direct corporate governance responsibility but rather provides a check on the information aspects of the governance system. 5 ©2005 Deloitte Touche TohmatsuWhere does the auditor fit in? 6 ©2005 Deloitte Touche TohmatsuAuditor’s Role in Corporate Governance § Corporate governance involves decision making, accountability, and monitoring. § Decisions require relevant and reliable information. § Accountability involves measuring, reporting, and transparency. §§ Monitoring involves systems and feedback. Monitoring involves systems and feedback. § Auditor’s primary role is to check whether the financial information given to investors is reliable. 7 ©2005 Deloitte Touche TohmatsuObjective of an Audit § To express an expert opinion on the § To express an expert opinion on the fairness with which financial statements fairness with which financial statements present, in all material respects, a present, in all material respects, a company’s financial position, results of company’s financial position, results of operations, and cash flows in conformity operations, and cash flows in conformity with GAAP. with GAAP. § To be able to express such an opinion, § To be able to express such an opinion, the auditor must examine the financial the auditor must examine the financial statements and supporting records using statements and supporting records using sound auditing techniques. sound auditing techniques. 8 ©2005 Deloitte Touche TohmatsuReliance on Financial Statements § People rely on financial statements to § People rely on financial statements to make economic decisions. make economic decisions. § Especially people outside the § Especially people outside the enterprise. enterprise. §§ Audit provides confidence. Audit provides confidence. § Audit reduces uncertainty and risk. § Audit reduces uncertainty and risk. § Audit adds value. § Audit adds value. 9 ©2005 Deloitte Touche Tohmatsu“Present Fairly in Conformity with GAAP” § Why might financial statements NOT § Why might financial statements NOT present fairly? Two main reasons: present fairly? Two main reasons: § ERROR. § ERROR. § FRAUD. § FRAUD. §§ Auditor Auditor’’s role is to look for s role is to look for misstatements caused by either reason. misstatements caused by either reason. 10 ©2005 Deloitte Touche TohmatsuFocus on Internal Controls § One reaction to corporate governance failures § One reaction to corporate governance failures has been to focus on public companies’ internal has been to focus on public companies’ internal controls: controls: §§ Sarbanes Sarbanes- -Oxley Act (SOX) requires separate Oxley Act (SOX) requires separate report on effectiveness of internal controls report on effectiveness of internal controls § Recent changes to ISAs place a much higher § Recent changes to ISAs place a much higher focus on the auditor understanding internal focus on the auditor understanding internal controls as part of the audit controls as part of the audit th th §§ Both ISAs and EU 8 Both ISAs and EU 8 Directive require Directive require reporting of material internal control reporting of material internal control weaknesses to Audit Committee weaknesses to Audit Committee 11 ©2005 Deloitte Touche TohmatsuReforms to ISAs § Another reaction to the audit and corporate § Another reaction to the audit and corporate governance failures is the expected changes to governance failures is the expected changes to ISAs dealing with: ISAs dealing with: § Group audits – requiring the group auditor to § Group audits – requiring the group auditor to have a more intimate understanding of the have a more intimate understanding of the entire group and its audit entire group and its audit § Related parties – placing more § Related parties – placing more responsibilities on the auditor to identify responsibilities on the auditor to identify related party relationships and transactions related party relationships and transactions 12 ©2005 Deloitte Touche TohmatsuAuditing is a Public Responsibility § Public accounting firms offer many § Public accounting firms offer many services to clients. services to clients. § Auditing is different. § Auditing is different. § It involves a public responsibility that is § It involves a public responsibility that is more important than the employment more important than the employment relationship with the client. relationship with the client. 13 ©2005 Deloitte Touche TohmatsuRelationship between the Board and the Auditors 14 ©2005 Deloitte Touche TohmatsuRelationship between the Board and the Auditors § To meet its obligations to shareholders, § To meet its obligations to shareholders, the board must ensure that it receives the board must ensure that it receives relevant and reliable information. relevant and reliable information. § Auditor assists the board in achieving § Auditor assists the board in achieving that goal. that goal. § There must be open and frank dialogue § There must be open and frank dialogue between the auditors and the board. between the auditors and the board. 15 ©2005 Deloitte Touche TohmatsuRelationship between the Board and the Auditors § Auditor must be open (candid) in § Auditor must be open (candid) in communicating with the board and its communicating with the board and its audit committee. audit committee. § May have to say things the client does § May have to say things the client does not want to hear. not want to hear. § May have to stand up to the client. § May have to stand up to the client. 16 ©2005 Deloitte Touche TohmatsuAudit Matters of Governance Interest th th § SOX, EU 8 Directive and ISAs all require the § SOX, EU 8 Directive and ISAs all require the auditor to communicate to the audit committee auditor to communicate to the audit committee and the board about: and the board about: § Approach, scope, limitations of the audit. § Approach, scope, limitations of the audit. §§ Going concern uncertainties. Going concern uncertainties. § Selection of and changes in accounting § Selection of and changes in accounting policies and practices. policies and practices. § Significant risks and exposures, such as § Significant risks and exposures, such as litigation, requiring disclosure. litigation, requiring disclosure. §§ Disagreements with management that could Disagreements with management that could affect the financial statements or audit affect the financial statements or audit report. report. continued continued… …,, 17 ©2005 Deloitte Touche TohmatsuAudit Matters of Governance Interest §§ More communication items: More communication items: § Audit adjustments that could significantly § Audit adjustments that could significantly affect the financial statements. affect the financial statements. § Weaknesses in accounting and internal § Weaknesses in accounting and internal control systems. control systems. § Expected modifications to the auditor’s § Expected modifications to the auditor’s report. report. § Irregularities, fraud, non-compliance with § Irregularities, fraud, non-compliance with law and regulations. law and regulations. § Other matters agreed in the terms of the § Other matters agreed in the terms of the audit engagement. audit engagement. 18 ©2005 Deloitte Touche TohmatsuRelationship between the Board and the Auditors § Auditors must express, to the board, § Auditors must express, to the board, their view on the appropriateness – not their view on the appropriateness – not just the acceptability – of the accounting just the acceptability – of the accounting principles used or proposed to be used, principles used or proposed to be used, and on the and on the transparency and transparency and completeness of the disclosures. completeness of the disclosures. 19 ©2005 Deloitte Touche TohmatsuRelationship between the Audit Committee and the Auditors 20 ©2005 Deloitte Touche Tohmatsu