Companies involved in accounting scandals throughout the world have received extensive attention which could be detrimental to their reputations. Apart from that, there is an increasing debate concerning the role of corporate governance, and audit efficiency to improve transparency and completeness of financial reporting. Does the absence of effective corporate governance and quality audits lead to these corporate failures?
A company with effective corporate governance demands upstanding and transparent behavior from the top management so that businesses remain sustainable for the foreseeable future. Corporate governance is strengthened with a clearly defined purpose, vision, values, and ethics. A company’s top management needs to set the tone at the top using policies and guidelines, strategic direction, and shaping the organisation’s culture.
Therefore, a check and balance system involving a clear distribution of responsibilities is needed to balance power and authority to avoid any abuse. This practice applies to the audit committee which is responsible for monitoring the reliability of the company’s financial statements.
Although the management oversees establishing and maintaining adequate internal controls over financial reporting, and adopting appropriate accounting policies, the audit committee is answerable to the regulators for publishing sub-standard financial reports.
The International Federation of Accountants (IFAC) stresses the need to clarify roles and responsibilities between the management and the audit committees. This includes having an independent audit committee to exercise unbiased judgement, and the audit committee is to provide regular updates to shareholders to ease information asymmetry between internal and external users of financial statements.
A company with effective corporate governance will improve investors’ confidence and is attractive to potential fund providers. A financial statement audit by independent third-party professionals assists investors to understand whether the financial information provided by the management of the invested company is fair and accurate, and then make investment decisions accordingly.
In one such case, an external auditor could not verify the transactions of a company had raised an audit red flag to alert users about the reliability of the company’s financial statements. Subsequently, an independent peer audit review reaffirmed the concerns about the company’s accounting irregularity.
Cases of accounting scandals have elevated the need for high auditing quality to keep the confidence of users relying on their audit opinions. In times of economic difficulties, auditors alert investors about possible going concerns issues of the invested companies. For example, when the Covid-19 pandemic in Malaysia halted business operations in 2021 and 2022, cases involving auditors commenting on Malaysian publicly listed companies’ business sustainability had been on the rise.
Quality audits can be attained when auditors design and perform effective audit procedures with sufficient evidence. For instance, the impact of material misstatements discovered in prior years’ audits, or technology changes in the client’s industry poses a significant risk that should render the auditor’s special attention. Therefore, more evidence must be collected in the current year’s audit.
In addition, an auditor’s competency level and independence play a major role in ensuring an effective audit. An auditor’s competency can be maintained when there are strict rules on the issue of auditing practising certificates and post-qualifying education with updated accounting standards and auditing standards. The auditor’s opinion may lack credibility when the auditing firm is collecting significant income from a single client or having a long-term personal relationship with the client’s management.
In conclusion, the role of auditing in effective corporate governance is irrefutable. Auditing provides an independent view of a company’s financial condition, while corporate governance ensures the company is being managed efficiently within the interests of all stakeholders. From the perspective of the business, embracing corporate governance ultimately fosters sustainability and assists companies in achieving these values.
Dr Nurliyana Binti Haji Khalid is a lecturer and Dr Chin Sok Fun is a senior lecturer for the School of Accounting and Finance, at Taylor’s Business School, Faculty of Business and Law, Taylor’s University.