External Auditing the Role of Essay

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:

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