The Role, Compromise and Problems of the External Auditor in Corporate Governance

Abstract

This study reflects on the role, compromise and problems of the external auditor in the corporate governance with particular reference to the UK. The external auditor is an independent person or firm of auditors appointed by the shareholders to investigate the financial statements prepared by the management and report his findings to the shareholders. This study identifies the various instruments used by government and accountancy bodies to regulate the role of the auditor. The statutory role of the external auditors is to issue audit report of his opinion on true and fair view of the financial statements. The study indicates that the role of the external auditor is greatly facilitated by efficient and effective internal control system and with the cooperation of the audit committee. However, the study provides striking evidence that in the course of the audit role, some auditors compromise their professional integrity for economic gain. The big four firms provide a better picture of the professional compromise. Alongside this, it identifies corporate accounting scandal linked to the professional misconduct of the auditors. Furthermore, the problems frustrating the effective role of the auditor within the framework of the corporate governance were identified in the study as auditor’s independence, morality, public expectation and audit market cartel. In conclusion, the study shows that the role of the external auditor is inevitable for good corporate governance. However, to have effective role of the auditor, it is recommended among others that the regulatory body should be directly involved in the appointment of auditors of large companies.

Keywords: Corporate governance, External auditor, Accounting scandal, Big four audit firms