Question

roles of external auditor in corporate governance

Answer 1

Answer is -

Corporate governance refers to the way a company directs and controls its institutional systems, ethics and accounts. It focuses on promoting transparency and fairness within establishments and organizations by monitoring performance and ensuring accountability. In keeping with the 2002 Sarbanes–Oxley Act, external audits are required of most publicly listed companies.

In that regard, external auditors serve as one of the primary protectors of corporate governance in any organization which are as follows -

1. Represent Interest of Shareholders : One of the primary roles of external auditors in corporate governance is protecting the interests of shareholders. This is possible because external audition reports are conducted independent of the company’s influence. External auditors report the state of a company's finance and attest to the validity of financial reports that may have been released. They ensure that the board receives accurate and reliable information. The board may also question the auditors' views and assessment on the appropriateness of the accounting principles used by a company.

2. Promote Accountability : External auditors may introduce measures and policies designed to compel accountability in the workplace. For instance, auditors could recommend penalties for officers who manipulate financial statements by inflating figures or cooking accounting numbers. Penalties for such acts could include stripping the manager of his position or his compensation, such as reducing annual bonuses, and even pensions.

3. Risk Assessment and Mitigation Planning : External auditors help promote corporate governance by conducting period risk assessment. Auditors review the security measures that a company has in place against corporate fraud or corruption. In addition to assessing potential risks, auditors also analyze the overall risk tolerance of the company as well as the efforts the company has made toward mitigating risks. For instance, if a company or government agency has an under-performing whistleblower system, efforts may be made to improve this.

4. Crisis Management : External auditors can help ensure good corporate governance by developing efficient crisis-management plans to be used in the event of allegations of fraud or corruption. The plan typically involves assigning responsibilities to different administrative officials. This way, if the company becomes involved in a financial crisis, officials have an active plan that they can use in sustaining confidence among investors. Crisis-management plans may also include control measures that are to be used with the media and law-enforcement officials.

5. Maintain Strong Relationship with Regulators : The efforts of an external auditor help foster a good relationship with regulators. Most regulators are supportive of companies and agencies that appear to have transparent operations. External auditors evaluate the organization of a company for compliance with regulations. Regulators are also more likely to trust company disclosures after an auditor attests to them.