An external auditor is from an independent firm which is hired by shareholder vote. The external auditors provide full evaluation, using specific formats for their audit, to investors, creditors and to participants who are somewhat connected to the specific business. Auditor has evaluated company’s financial situation and if the whole dates would be accurate it gives more benefit for owner of the company. The reason is that financial statement is more reliable when it checking by the external auditors and when it is absolutely
Ethics continues to be a hot issue in the business world. The focus on business ethics grew after several significant business scandals beginning in the millennium. These scandals prompted the government to pass new accounting regulations to increase the control and accuracy of financial reporting. A prominent piece of legislation is the Sarbanes-Oxley Act of 2002, which applies to publicly traded businesses. The basis of Sarbanes-Oxley is to increase the reliability and accuracy of financial reporting (Noreen).
In order to maintain and increase the independence of external auditors, some activities should be undertake to avoid the overdue market competition in professional accounting industry and enhance the supervising ability of the regulators. .What follow is a detailed analysis of the association between external auditors and companies. The discussion on the importance of independence for external auditors Audit is a process to evaluate and review the accounts and financial statement objectively. We can divide it into internal auditors and external auditors. Internal auditors have a inner knowledge of business process.
Sarbanes-Oxley was designed to address the fraudulent accounting practices undertaken by the accountants for Enron and WorldCom. One of the biggest problems with regard to the accounting used in preparation of financial statements by corporations has been the issue of non-salary executive compensation. Corporations, as part of a combined incentive and retention program, often offer executives stock options and enhanced performance pay. The key debate, with regard to accounting practices, has been how these incentives should be depicted on annual and quarterly corporate financial reports. The position of the Internal Revenue Service has been that corporations, in order to fairly obtain the tax benefits often garnered on corporations based on their compensation plans, should list these compensation plans (options, in particular) as expenses on their financial reports.
The expansion of investment driven businesses has raised the need of assuring the credibility of the financial information that is presented to the shareholders and other users involve in the process. The periodic financial statements prepared by the management of an organization and audited by the auditors are the main source that investors rely upon, therefore; the auditors are expected assure whether the financial statements presented are free from any material misstatements and represent the true and fair view of the company (Ruhnke & Schmidt 2014, p. 572). The corporate collapse cases such as Enron and Pamalat raised the concerns about auditor’s responsibility and the auditor’s service was criticised by the public due to the disparity
SOX were put into place because it forces companies to pay more attention to internal controls. This system forces the company’s responsibilities on corporate executives and boards of directors to make sure that the companies’ internal controls are effective and reliable and less than one part of the law, companies must develop sound principles of control over financial reporting. The companies must continually develop and check sound principles of control over financial reporting and that the system is in working condition. Independent outside auditors must attest to the level of internal control. In addition, SOX also developed the “Public Company Accounting Oversight Board”, (PCAOB) which now establishes auditing standards and regulates auditor activity.
Besides, a transparency committee can also help with internal auditor appreciate its primary responsibility lies with the board, not for personal interest and pleasing the leader. ii. Corporate culture In Enron, it was dictatorial and revenue-based to new ideas. Leaders not only fostered a wrong sense of security for employees, paying high wages to keep workers dependent on the system via golden handcuffs, but also may allows employees did unethical behaviors. This repressive and illegal corporate would eventually make company lost creditability, or else, make company
Hence audit committees require the companies to disclosure whether or not a financial expert is member of the committee. One of the requirements was that the Commission encouraged the use of audit committees composed of independent directors. They explained that a committee with independent directors on board was in better position to assess objectively the quality of the issuer 's financial disclosure and the
Regulations designed to establish responsibility, segregation of duties, and accountability protect investors, management, and the public. The result of a financial outrage and catastrophes of WorldCom, Enron, Tyco, Hollinger, and Tyco necessitated the need for better regulation and control leading to the creation of the Sarbanes Oxley Act (SOX). Public Law 107-204 of the 107thCongress was enacted by the senate and House of Representatives to “To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.” This law is better known as the Sarbanes Oxley Act, consists of a number of sections designed to oversee and prevent securities fraud, and enhancements to white-collar crime. Thesix key principles of the SOX internal controlsaccording to Internal Control and Cash are: establishment of responsibility, segregation of duties, documentation procedures, independent verification, physical controls, and other controls. Sarbanes Oxley has changed internal controls through risk mitigation and accountability.
Those companies that go away from the suggested practices are required to make clear why they have done so (Kimber & Lipton, 2005). The underlying principle behind this approach is to make sure that the market is knowledgeable about a company's corporate governance practices. At the same time, there is also acknowledgment that suitable practice may differ from company to company. In particular, smaller listed companies frequently find it hard to meet the terms of requirements such as foundation of several board committees where they have comparatively small boards (Kimber & Lipton, 2005).