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ABSTRACT:
The recent fall of the company SATYAM and the role played by its Auditor and auditing committee, has buzzed an alarm in the
Indian capital market. It has resulted into shaking the confidence of the public investing in the stock market. It has led to
drastic declines in share prices and substantial financial losses to minor shareholders. Both public and experts have
acknowledged primary cause of these scandals as failure of corporate governance. This article tries to highlight the significant
responsibilities of an auditor and auditing committee for protecting the interest of shareholders and investing community.
Key words: Auditor, Auditing committee, corporate governance and investing community
1. Introduction:
Doing right things and doing them in the right way is the essence of Corporate Governance Anonymous
Corporate governance refers to the relationship that exists between the different participants and defining the intention
and implementation of a corporate firm. The bodies like the CEO i.e. the management, the board of directors, the
shareholders and the auditors and audit committee work together and mutually run an organization for interest of all
the stakeholders.
Excellent corporate governance needs to include effective internal control systems, policies, procedures and group to
direct management to serve needs of all stakeholders. Corporate governance concentrates on management as well as on
shareholders wellbeing. Internal as well as external corporate governance helps organization in board culture, their
share price in market, future need for raising capital and the most important is to gain shareholders trust.
Corporate governance means acceptance of management as trustees on behalf of the shareholders and to secure their
rights as the true owners of corporation. It is about maintaining commitments to code and conduct, ethics and values in
organization, as corporate governance is nothing but ethics and moral duties.
2. Literature Review
As per the Organization for Economic corporation and development (OECD) documents (1999), Corporate Governance
(CG) is the system by which organization are directed and controlled. Corporate governance designed to keep intact
and disclose to shareholders in manner truly reflect the position of corporate.
Milton friedman (1962) suggested that corporate governance is to carry out the business in accordance with owners
(promoters) and shareholders aspiration, which generally will be to make as such money as possible, while in
compliance to the fundamental rules of the society embodied in law and local customs. He talked about shareholders
capitalism. Corporate governance means doing the whole thing superior, to get better relation between companies and
their shareholders, full disclosure of information to all stakeholders and to monitor executive management properly in
the interest of shareholders.
Cadbury Committee Report (1992) defines Corporate Governance as the system by which companies are intended for
and restricted. It is generally understood as the framework of rules, regulations, relationships, system and processes
within and by which authority is exercised and controlled in corporations.
Kumar Mangalam Birla Committee Report (1999) mentioned that corporate governance is essential intention to
enhance long term shareholders value and to protect interest of other stakeholders.
Aravanan (2001) suggested that CG is basically system of making directors accountable to the stakeholders for effective
management of the companies, with concerns of ethics and value. This is related to Board of directors who are
members of auditing committee too, whose role is to check transparency, integrity and accountability of the
management toward shareholders and investing community.
Shareholders value is enhanced by honest and transparent board of Directors. (Vepa Kamesam, 2006). Jyothi Dhawan
identifies the role of board of directors in CG, which inculcate a sense of accountability towards all stakeholders. The
audit committee would search for the integrity and reliability of financial statement and reassure shareholders. (AICPA,
1967; Auerbach, 1973 and FCCG, 1999).
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The responsibility of audit committee in the area of corporate governance is to provide assurance that the corporation is
in rational compliance with relevant laws and regulations, is conducting its affairs fairly, and is maintaining effective
controls against employee conflict of interest and fraud.(Muhammad Faisal Siddiqui) An audit committee consisting
independent directors can have control over management and thereby acting as a sort of assurance to the shareholders
that they will have full disclosure of correct information. To have good corporate governance, audit committee needs
resource persons to act as independent director on whose shoulder lies the responsibility to take the company in the
right path, demand for more disclosures, transparency and accountability and performance standards for investors and
lender and protection for shareholders. (Abhas)
The shareholders of the company place very high trust on the auditors report, which apparently shows the true and fair
view of the accounts of the company. The auditor should perform their duties with extreme care and vigilance to ensure
that there is no illegal or improper transaction. (Harsh Gargani and Ritika Jhurani, 2009). Auditor independence would
be safeguarded if audit committee were made up of a majority of independent and non executive directors, and this
might signify that their independent status would contribute to auditors independence through bridging
communication network. (Zulkarnain Bin Muhamad Sori, Shamsher Mohamad and Mohd Saad. (2008). Knapp (1987)
found that an audit committee if is more likely to support the auditor rather than the management in audit differences
and the level of support is steady across members of the audit committee which will secure interest of shareholders too.
Department of Company affairs guidelines (2000) have recommended proper disclosure to the shareholders and
investing community, which is done by role and influence of auditing committee only. The problem in Indian
Corporate Sector is that of controlling the leading shareholders and safe guarding interest of minor shareholders, which
can be solved by board of directors who are accountable to all stakeholders; it would make governance more easy
(Jayant Rama Varma, 1997).
3. Objectives:
This article focuses on the role of auditor and auditing committee in corporate governance and securing interest of
shareholders and investing community. The assessment of what these two forces should do under statutory framework
for shareholders and what actually they are doing. The article discusses both above mentioned point by studying case
of Enron and the company SATYAM.
Source: Financial Management for Managers, the ICFAI University, November 2006
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8. Responsibilities of an auditor
The statutory responsibilities of the auditor fundamentally require the following:
1. Duty to make certain inquiries
2. Duty to make a report to the company on the accounts examined
3. Duty to make a proclamation in terms of the provisions set.
4. Detection and Prevention of Fraud
5. Duty to report fraud
6. Duty as to substantial precision
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Code of corporate governance enhances the effectiveness of audit in the interests of stockholders and stakeholders and
that is why they are relying on auditor heavily. Auditor has power to detect wrongdoer in management and report on
the company objectively. An independent auditor can play his role effectively and maintain good governance. They can
also remove bias from companys financial reports. But on the availability and effectiveness of quality auditors, some
argue that East Asian auditors lack expertise or willingness to supply quality audits. There is also some concern that
auditors monitoring role may be in conflict with their consulting activities with client firms, an issue not unique to
Asia. Also, the disciplinary mechanisms for auditors may be poor, which may have diluted the independence of
auditors in Asia. Furthermore, initiatives have been taken by drawing up the Code in ensuring that the Board of
Directors is responsible and accountable. So the independent directors in auditing committee can encourage auditor to
perform his role diligently and honestly.
Much more stress is placed on auditors in the perspective of corporate governance because in most of cases, auditors
will be the first person to spot corporate abuse. This is due to the nature of auditing function and the purpose of
auditing company accounts. It can also be a case of the only person who is aware of the misuse besides the wrongdoers.
Thus, in many cases the auditors prefer to fall short to discover the wrongdoing at the expense of their duties and
obligations. Auditor has to be bold enough to bring forth all the facts in his report and there should be no hesitation on
his part in disclosing the defects, defaults, irregularities, discrepancies etc., even if the management of the company is
involved in the same. He must perform his duties in right earnest and honestly. For the same, audit committee should
monitor auditors performance. The audit committee should discuss various matters with the auditor related to their
independence and what audit committee expects from auditor in interest of shareholders and other stakeholders except
management. But it is not only expected from auditor to do his duties diligently but also audit committee should have
guts to ask questions to management regarding any matter which is related to shareholders and investing community.
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In Enron, Anderson was making report on the companys account and they did not report fraud to the shareholders and
stakeholders because it was committed by management. If auditors have reported, then perhaps they will not be
appointed in succeeding years. They made sure that they were in managements good book. Auditors of SATYAM
(PwC) were paid heavy amount by Raju (CEO), Srinivas Vadlamani (CFO) and other directors for window dressing the
companys account, and hiding frauds and lured the investors to invest their hard earned money by manipulating facts
and figures. By keeping himself into managements good book, PwC worked as SATYAMs auditor from 2000 to 2008.
10. Conclusion:
The role of audit committee and auditors in current scenario become very crucial. Stakeholders expect loyalty and trust
from auditor and auditing committee while resolving financial facts and exposing at all fraud and fault in organization.
The audit committee members experience, relevant exposures, qualification background and in depth knowledge need
to be highlighted and confirmed because if directors are experts, experienced, qualified, financial wizards, then they
can have vision and foresightedness to protect stakeholders. If a company has an active and strong audit committee
then independent auditors working will be supported. Further the system of selection and appointment of auditor on
their quality and experience need to be explored.
Over and above laws and regulations, being responsible professionals and representatives of shareholders and investing
community, Auditing committee and auditor should perform their role diligently and ethically to secure interest of not
only company and investors but all stakeholders. This is possible when independent directors will have their own
weight and right to ask questions to management, which in turn will give strength to auditor to be ethical.
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AUTHOR
Hetal Pandya / Vyas is Assistance Professor at GLS Institute of Computer Technology and research scholar at
Nirma University, Ahmedabad, Gujarat. She has received B.com and M, com degree from Gujarat University.
Her research interest areas are Corporate Governance, Corporate Social responsibility and Behaviour finance.
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