Corporate Governance
Explain how external auditing helps ensure good corporate leadership
Corporate leadership is simply the processes and policies via which a firm manages its traditions, finances and institutions. Corporate leadership is important as it enhances workplace honesty and impartiality in firms and organizations. It achieves this via thorough output monitoring and enforcement of accountability in all sectors. One of the most important specialists which strengthen the resolve of corporate leaders in following good governance habits is an external auditor.
An external auditor's main function is to ensure the firm's shareholders do not suffer any unnecessary losses. As an external auditor has no affiliation with the company, this objective is easily met. Determining the health of a firm's finances and the accuracy of previous financial statements are also functions of an external auditor. An audit gives the shareholders rest of mind over the firm's true condition and sometimes, they ask for the auditor's opinion about the financial process applied within the firm (Keith, (2017).
So as to foster accountability, external auditors might suggest new processes and steps which should be adopted by the firm. An example of this could be suggesting proper punishment measures for workers found guilty of modifying financial numbers and artificially increasing cost. These crop of workers should be demoted or outright laid off or could lose their benefits such as pensions and bonuses.
Another way good corporate governance is enhanced by external auditors is by carrying out period risk examination. The auditors check the firm's safeguards against business fraud or unethical acts, also, the level of risk that can be managed by the company and the effectiveness of their efforts in reducing this risk are also examined by them.
Finally, the external auditors have the function of creating ingenious and effective crisis management processes for the firm which would be applied whenever they are accused of dishonesty and unethical acts. In most cases, assigning of duties to a number of top executives is always one of the first steps in this situation. Whatever the situation is, the firm's leadership must have a go-to framework which they apply to retain the public confidence in them among their investors and customers. (Keith, 2017).
2. How did
This need for this law arose in the aftermath of the shameful accounting-related events in companies like Enron, Tyco international and WorldCom among others (Ference, 2014) and it was developed as a basic yardstick for financial firms and the general public to prevent loss of trust in the American companies.
Just before this became law, several accountants were found guilty of unethical and substandard acts. Some of these were embezzlement, modification of numbers, fraud and corruption. These acts cause many US public citizens to lose their savings. Equally, workers in other corporate sectors which work together- with the accounting sector noticed these dishonest acts but didn't report them in causing a negative stereotype of CPA. CPA guidelines clearly state that fellow accountants or auditors should not hesitate in reporting cases or rumors of unethical acts (Ference, 2014)
3. How do people interpret the term 'public watchdog' with regards to the functions of an external auditor?
External auditors are called public watchdogs as it is widely believed that these set of people have the task of revealing signs of unethical conduct or other dangerous acts that could affect the savings of the public. Some of the possible acts are shady actions or poor monitoring of employee activities. External audits are expected to help clients understand the associated risks with dealing with a firm. If the client is in danger of suffering losses of funds via theft or corruption among others, it is the job of the external auditor to make this known (ICAEW.com, 2011). Several sectors of an organization could be the drivers of the unethical actions such as the workers, the executives or groups within the firm
Even though an external auditor is not expected to entertain fear in blowing the whistle on any illegal activities, it is advisable that they exercise caution so that they do not become victims of attacks. They should have proper understanding of the means by which frauds occur. An example is the diversion of funds via unchecked financial records or giving too much financial control to a person. Another instance is allowing business funds to be used for personal needs. External auditors have the function of reducing the dangers common in the sector of financial handling which fraudulent persons can take advantage of such as poor leadership direction, unequal function distribution or even lack of vacations for major finance officials (Morrissey, 2000).
With time, a mutual…
