External Auditing the Role of Essay

Download this Essay in word format (.doc)

Note: Sample below may appear distorted but all corresponding word document files contain proper formatting

Excerpt from Essay:

However, there has also been hesitation within government to challenge auditors too aggressively. Because accounting scandals have the power to wipe out a major auditing firm, there is considerable sentiment that the existing industry structure needs to be protected, and that all four major firms should be kept from significant scrutiny, lest one of them collapse, ruining competition in the industry. Already the rapid acceleration of audit fees indicates oligopolistic behavior on the part of the Big Four (Ascher, 2008). As a result of this situation, a series of potential solutions was developed, including liability limitations that would allow auditors to avoid financial ruin in the event of another Enron-sized scandal. However, no action was taken on these options. Nonetheless, evidence has showed that audit quality has improved post-SOX, especially with respect to high-risk companies and companies formerly audited by lower-independence auditors (

Real Life Examples

When the SEC began its campaign to overhaul the auditing industry in 1998, the idea was not to change the role of auditors in corporate governance. The SEC merely wanted to enforce the role that it felt already existed. With the sweeping structural changes to the external audit industry, however, the role did change for some firms.

This was particularly in evidence at Tyco, one of the companies whose scandal prompted the SOX legislation in the first place. One of the major governance issues at Tyco was that the company paid its auditors millions of dollars in consulting fees. The company responded by ending the consulting relationship, allowing their auditors to simply conduct that task independently (Cope, 2002). The role of the audit in corporate governance shifted from that of a cursory, rubber-stamp situation to one where the audit's traditional role as a strong governance tool was restored.

Other companies, however, are not willing to make such changes. Each nation has its own version of Sarbanes-Oxley (Bhisham, 2009). Yet when they list their stocks in the United States, they must adhere to all of the terms of SOX. This dramatically increases their auditing costs. While SOX was designed to improve the role of auditing in the corporate governance function, for foreign firms it is often viewed as an expensive redundancy. English company ICI, for example, chose to delist from the New York Stock Exchange rather than deal with the added burden of modern auditing (Madigan, 2007). In essence, for firms such as ICI, the role of auditors was not changed by the structural overhaul of the industry. The cost, however, was changed. If one believes that SOX is more stringent than the rules of the London Stock Exchange, then it could be argued that by increasing the auditor's role in governance, the level of governance actually decreased.


For all of the changes to the auditing industry in the past ten years, the basic functional role of the external auditor has not changed much. Auditors are still not directly involved in corporate governance, but they still play an important ancillary role. Auditors are a check on the corporate governance system, operating independently, just outside of the system.

In this respect we can see the most significant change to the role of auditors in corporate governance -- the increase in importance. The audit function has become more complex in the past ten years. Poor auditing was not known to have high risks until Enron and other scandals exposed the true intensity of the risks. Poor auditing could kill a company. Coupled with the more stringent requirements of the Sarbanes-Oxley Act, auditing has increased substantially in importance.

The new rules have been put into place at the behest of the SEC, specifically to protect investors. The scandals highlighted the need for a truly independent last line of defense. Thus, the traditional role of the external auditor in the corporate governance process has been restored. The role may have drifted for some time prior to 2002, but the increased responsibilities of auditors has brought the importance of external auditors in the corporate governance process back to the fore.

Works Cited:

Barr, Stephen. (2000). Breaking up the Big 5. CFO Magazine. Retrieved March 29, 2009 from http://www.cfo.com/article.cfm/2988066/1/c_2984378?f=archives

No author. (2002). Panel of Audit Effectiveness: Report and Recommendations, Chapter 5. Retrieved March 29, 2009 from http://www.pobauditpanel.org/downloads/chapter5.pdf

No author. (2000). Panel of Audit Effectiveness Releases Final Report. Public Oversight Board. Retrieved March 29, 2009 from http://www.pobauditpanel.org/press.html

Arnold, James. (2002). Audit Giants Called to Account. BBC. Retrieved March 29, 2009 from http://news.bbc.co.uk/1/hi/business/1760107.stm

H.R. 3763. Sarbanes-Oxley Act of 2002. Retrieved March 29, 2009 from http://news.findlaw.com/hdocs/docs/gwbush/sarbanesoxley072302.pdf

No author. (2009). Standards and Related Rules. Public Company Accounting Oversight Board. Retrieved March 30, 2009 from http://www.pcaobus.org/Standards/Standards_and_Related_Rules/index.aspx

Broadley, Derek. (2006). Auditing and its role in Corporate Governance. Deloitte Touche Tohmatsu. Retrieved March 30, 2009 from http://www.oecd.org/dataoecd/50/6/37178451.pdf

Hodgson, Paul. (2007). Big Four Audit Firms Feel the Effects of Post SOX Inroads as Audit Fees Skyrocket. Marketwire. Retrieved March 30, 2009 from http://www.marketwire.com/press-release/the-Corporate-Library-770551.html

Ascher, Bernard. (2008). The Audit Industry: World's Weakest Oligopoly? American Antitrust Institute Retrieved March 30, 2009 from http://www.antitrustinstitute.org/archives/files/AAI%20Working%20Paper%20No.%2008-03_091820081520.pdf

Madigan, Peter. (2007). ICI Delisting ends Bad Month for U.S. Markets. OpRisk & Compliance. Retrieved March 30, 2009 from http://www.opriskandcompliance.com/public/showPage.html?page=449267

Bhisham, Jaswal (2009). Taxing Overseas Firms for SOX Compliance. Street Directory. Retrieved March 30, 2009 from http://www.streetdirectory.com/travel_guide/62469/accounting/taxing_overseas_firms_for_sox_compliance.html

Cope, N. (2002). Outlook: Tyco's Kozlowski finds himself painted into a corner. The Independent. Retrieved March 30, 2009 from http://www.independent.co.uk/news/business/comment/outlook-tycos-kozlowski-finds-himself-painted-into-a-corner-644558.html[continue]

Some Sources Used in Document:


Cite This Essay:

"External Auditing The Role Of" (2009, March 29) Retrieved December 7, 2016, from http://www.paperdue.com/essay/external-auditing-the-role-of-23491

"External Auditing The Role Of" 29 March 2009. Web.7 December. 2016. <http://www.paperdue.com/essay/external-auditing-the-role-of-23491>

"External Auditing The Role Of", 29 March 2009, Accessed.7 December. 2016, http://www.paperdue.com/essay/external-auditing-the-role-of-23491

Other Documents Pertaining To This Topic

  • Auditing the Role of Databases

    In other words, if the financial difficulties they encounter are the fault of the auditing firm, they will have protection from any legal ramifications they may have encountered from faulty accounting or auditing measures. Preventive measures are also part of the internal controls of the auditing firm itself, so that each person who works with that firm knows the measures that are to be taken to make sure auditing

  • External Auditing UK Modern Corporations

    " This project is considered to be the first major update to the Smith Guidance. It was felt that the update was required to shore up some of the deficiencies in the Smith Guidance that have emerged since it was published. There were characteristics of the market that it was felt needed to be addressed, in particular the oligopolistic nature, which exposed the market to considerable uncertainty in the event

  • Audit Quality and Agency Cost

    Audit Quality and Agency Cost Since the advent of industrialization, there has been the presence of a bond between the people who invest and the people who manage those investments, forming a vital relationship amongst the two groups. Although with the rise of such relationships, the soaring issues of trust and confidence have been a hindrance in economic growth. Viewing the high percentage of the capital of investors or shareholders in

  • External Internal Factors Nike Is an

    Contract global employment under the Nike Code of Conduct has been altered significantly, as diversity of legal and social standards for employment come into play in Nike factories all over the world. Nike also actively seeks to allow contractor managers and employees visits to domestic operations of both management and manufacture and hires within these pools when they can to increase domestic diversity. Ethics are an essential aspect of the

  • Auditing in the Public Sector

    Auditing function has undergone several transformations from the periods when it was simply a function of giving opinion but also to an error where auditors are looked upon to offer advisory roles. The auditors should therefore advice the government on the impacts of their operations on the public and on other improvements that can be made to maximize on the service delivery. In pursuing their taxation policies and fiscal

  • Role of Accounting in Economy

    " (2004) Ricol states in relation to the audit area that "...actions were recommended in two primary areas: 1) Reducing threats to auditor independence; and 2) Strengthening audit quality control processes. (Ricol, 2004) In regards to corporate management and governance, it is related in Ricol's speech that the task force called for corporate boards to "demonstrate greater accountability for the information, financial management and internal controls necessary to produce trustworthy information. Sound corporate

  • Audit of the Rocks Hotel

    The management team is literally flying in the dark with no compass, altimeter, or method of navigating just how they are doing, which strategies are working or not, and what corrective action to take to improve. This lack of measurement is exacerbated by the cultural differences between guests, who may be from international locations. With no method in place for capturing the variation in expectations vs. experiences, the management

Read Full Essay
Copyright 2016 . All Rights Reserved