v CORPORATE GOVERNANCE
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled.[/b] Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large.
Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world.
v AUDIT[/b]
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The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product.[/b] The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and for energy conservation.
Audits are performed to ascertain the validity and reliability of information; also to provide an assessment of a system's internal control. The goal of an audit is to express an opinion on the person / organization / system (etc) in question, under evaluation based on work done on a test basis. Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements - a concept influenced by both quantitative and qualitative factors.
v Types of auditors
1. External Auditor
2. internal Auditor
External auditor / Statutory auditor is an independent Public accounting firm engaged by the client subject to the audit, to express an opinion on whether the company's financial statements are free of material misstatements, whether due to fraud or error. For publicly-traded companies, external auditors may also be required to express an opinion over the effectiveness of internal controls over financial reporting. External auditors may also be engaged to perform other agreed-upon procedures, related or unrelated to financial statements. Most importantly, external auditors, though engaged and paid by the company being audited, are regarded as independent auditors.
The most used external audit standards are the US GAAS of the American Institute of Certified Public Accountants; and the ISA International Standards on Auditing developed by the International Auditing and Assurance Standards Board of the International Federation of Accountants
Internal auditors of internal control are employed by the organization they audit. Internal auditors perform various audit procedures, primarily related to procedures over the effectiveness of the company's internal controls over financial reporting. Due to the requirement of Section 404 of the Sarbanes Oxley Act of 2002 for management to also assess the effectiveness of their internal controls over financial reporting (as also required of the external auditor), internal auditors are utilized to make this assessment. Though internal auditors are not considered independent of the company they perform audit procedures for, internal auditors of publicly-traded companies are required to report directly to the board of directors, or a sub-committee of the board of directors, and not to management, so to reduce the risk that internal auditors will be pressured to produce favorable assessments.
The most used Internal Audit standards are those of the Institute of Internal Auditors.
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v duties and obligations of auditors[/b]
The duties and obligations of auditors must be determined in reference to the purpose for which an audit serves. The duties and obligations must be made more relevant, useful and reliable to existing individual shareholders, directors, audit committee, prospective shareholders, employees, creditors, guarantors, companies wishing to exercise takeovers, mergers and acquisitions, trustees, beneficiaries, regulatory bodies, government and membersof the public. Furthermore, from an international perspective, the duties and obligations of auditors have been widened.
Therefore, in conducting an audit, auditors are now obliged to take a much stricter approach to their clients. There is an increasing support for the view that auditors should take on a more active role. Thus, there is a clear need to depart from the metaphor that auditors are merely watchdogs, to formulate more exacting duties and obligations of the auditors. Provisions have been enacted in ‘the Companies Act’ in relation to appointment, eligibility, qualification, disqualification and removal of auditors.
The intention is to ensure that auditors are able to conduct auditing in an impersonal, objective and professional manner. Furthermore, it is also to ensure that auditors are independent of the company. This is because independence is the virtue an auditor’s honesty. Auditors being professionals just like other professionals must be independent of the client that is receiving the service. The underlying reason for such emphasis and requirement is to ensure the auditors are not in a position of conflict of interests.
However, in some cases there is possible conflict of interests despite the measures taken by ‘the Companies Act’. This is because in reality there is conflict of interests. This has been seen in cases where auditors provide nonauditing services to the company which they are auditing. This is because some
auditing firms have branched to diversified services beyond auditing since nonaudit services are lucrative. It has reached a point where auditing and nonauditing services has become indistinguishable. 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. 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’ Consequently the auditing standards have also been compromised. However, it was felt that in principle there is no conflict on interests. But what is more important is the reality. Thus, independence of an auditor is integral to the auditor’s duties and obligations. Auditors can only obtain the contracts for non-auditing services if they maintain a good relationship with the management. Furthermore, auditors are dependent on their clients for livelihood. Thus, the auditors are under extreme pressure to ensure that they are retained. If they qualify the report or manage to detect the wrongdoings of the management, it is unlikely that they will be appointed by the management in the future. Thus, auditors may be lenient to their clients which give room to further conflict of interests. Auditors should be able to carry out their duties without fear or favour.
This raises concern about ensuring objectivity and independence. Furthermore, it poses danger to the credibility of auditors. Although the law attempts to ensure that auditors are not too closely connected with the company whose accounts they are auditing, but the distance could and should be further. If auditors are allowed to provide non-audit services, the auditor will be closely connected. Moffit J in Pacific Acceptance Corporation Ltd v Forsyth (1970) found that this conflict is real, practical and apparent and that auditors must guard against this. The conflict worries stockholders and stakeholders. Therefore, where there is such conflict of interests, disclosure must be made to stockholders and stakeholders. Alternatively, there should be prohibition with regards to providing of non-audit services to the company where they act as auditors. This is to ensure that the auditor is impersonal, objective, professional and independent. The Ethics Standards Board which is part of the UK accountancy regulator is of the opinion that auditors should not provide audit and non-audit services to the same client. Nonetheless, in Malaysia there is no such prohibition.
Rightfully, the Code should be amended to include a provision that an auditor should not be allowed to offer any form of non-audit services to the company, which may put the auditors in a position of conflict of interests. A further problem with regards to the closeness between the management and the auditors is that in practice, it was found that the demarcation between the duties of the auditors and the financial reports released by the management is unclear. This is because there have been negotiations and compromises between the management and the auditors. The [/b]management of the company prefers to engage the auditors for non-audit services because of the comfortable personal relationship with the auditors.
Therefore, the concern is where does the duty of the management end and when does the duty of the auditor begin. A point to be noted is the length of the auditors’ relationship with the company. This is because this will reflect whether