Management v. Auditors Responsibility
Responsibilities of Management and Auditors & the Public Perception series of high-profile business melt-downs in 2001, led by the Enron scandal have put the roles and responsibilities of the corporate management and the auditors in sharp focus. The public outcry against the necessity of preventing such crises in future has led to stricter regulation and extensive debate about the responsibilities of the management and the auditors. In this paper I shall explain the management's role and responsibilities verses the auditors' and also discuss how the public's perception of the auditor's duties have differed over time from that of the profession's.
The Management's Responsibilities
The management is responsible for formulating policies in an organization for efficient utilization of resources, setting goals, and providing the necessary resources, leadership and direction for achieving the goals. The ultimate objective of the management in a for-profit organization is to maximize the share-holder's value while remaining within the rules and regulations of the business.
In order to achieve these objectives, the management has to put in place a workable structure, policies and procedures called the 'internal control system.' An effective internal controls system in an organization ensures effectiveness of its operations and minimizes chances of violation of rules and regulations by the employees. However, it is important that the management shows its commitment towards the internal controls and considers it as a positive tool for achieving the aims and objectives of the organization, rather than viewing it just a regulatory requirement. Management's attitude towards its own internal controls is crucial because it trickles down to lower levels and the resultant culture often determines the success or failure of the organization. A classic example of this is the Enron board's decision to waive the company's conflict of interest policy for allowing its CFO to invest in the company's special purpose entities (SPEs) and ultimately opened the floodgates of creative book-keeping.
The Auditors' Responsibilities
The auditor's role is much narrower and is confined to that of a watch-dog. An auditor normally carries out an objective and professional...
Some experts such as Manuel A. Tipgos feel that it is not possible to stop management fraud unless the management voluntarily imposes its code of ethics on itself since it owns the internal audit and the audit committees. (35-36). The Sarbanes-Oxley Act attempts to remedy this situation by expanding the role of the audit committee and making it responsible for appointing and overseeing the performance of the internal auditors. It also prohibits the auditors from performing non-audit functions for their audit clients. Independence from management influence and pressure is, therefore, crucial for effective performance and fulfillment of their responsibilities by the auditors. At the same time it is also important for the audit committees to asset their authority and not to get influenced by the management since the over-riding interest of the management (i.e., the maximization of profits) is not always in line with the interests of other stock-holders in the market, including the auditors and the stock-holders.
Public's Perception of the Auditor's Duty
Historically speaking, auditing was considered to be the core function of the accounting profession. Auditors were also granted the unprecedented privilege of 'self-regulation' for almost a full 100 years by the public and the government and were trusted to provide professional service and act as watchdogs of the corporate and financial world on behalf of the investors. The accounting and the auditing profession was regarded highly as one of the most 'professional' of occupations until the profession failed to adjust (in contrast to some other professions) to the rapid advancement in information technology in the 1980s and 90s. Many experts started to consider the accounting profession as increasingly…
