Management vs. Auditors: Responsibilities and Public Perception

Introduction

The series of high-profile business failures in 2001, led by the Enron scandal, put the roles and responsibilities of corporate management and auditors into sharp focus. The public outcry over the need to prevent such crises in the future prompted stricter regulation and extensive debate about what management and auditors are each responsible for. This paper explains the management's role and responsibilities compared to the auditors', and also discusses how the public's perception of the auditor's duties has differed over time from that of the profession itself.

Management is responsible for formulating policies within an organization for the efficient utilization of resources, setting goals, and providing the necessary resources, leadership, and direction for achieving those goals. The ultimate objective of management in a for-profit organization is to maximize shareholder value while remaining within the rules and regulations governing the business.

The Management's Responsibilities

In order to achieve these objectives, management must put in place a workable structure along with the policies and procedures collectively known as the internal control system. An effective internal controls system ensures the efficiency of an organization's operations and minimizes the chances of employees violating rules and regulations. It is important, however, that management demonstrate its genuine commitment to internal controls and regard them as a positive tool for achieving organizational aims and objectives, rather than viewing them as merely a regulatory requirement.

Management's attitude toward its own internal controls is crucial because that attitude filters down to lower levels, and the resulting organizational culture often determines the success or failure of the enterprise. A classic example of this dynamic is the Enron board's decision to waive the company's conflict-of-interest policy in order to allow its CFO to invest in the company's special purpose entities (SPEs), a decision that ultimately opened the floodgates to creative bookkeeping.

The auditor's role is much narrower and is confined to that of a watchdog. An auditor normally carries out an objective and professional review of a company's operations in order to ensure that accounting rules and regulations are being strictly followed in letter and spirit, and to confirm that the financial statements truly reflect the company's financial health.

The Auditors' Responsibilities

Although the auditor's role as the corporate watchdog is desirable for ensuring compliance with prescribed accounting standards, it must be remembered that the role of internal auditors and audit committees in detecting and preventing financial irregularities is limited unless management actively facilitates their functioning. Some experts, such as Manuel A. Tipgos, argue that it is not possible to stop management fraud unless management voluntarily imposes its own code of ethics on itself, given that it effectively owns both the internal audit function and the audit committees (Tipgos 35–36).

The Sarbanes-Oxley Act, enacted in July 2002, attempts to remedy this situation by expanding the role of the audit committee and making it responsible for appointing and overseeing the performance of internal auditors. The Act also prohibits auditors from performing non-audit functions for their audit clients — a provision prompted, in part, by the revelation that Enron paid its auditor, Arthur Andersen, more in non-audit fees ($27 million per year) than in audit fees ($25 million per year), a disparity widely seen as evidence that performing non-audit functions compromises auditor independence.

Independence from management influence and pressure is therefore crucial for the effective performance and fulfillment of auditors' responsibilities. It is equally important for audit committees to assert their authority and resist being influenced by management, since management's overriding interest in maximizing profits is not always aligned with the interests of other stakeholders in the market, including investors and shareholders.

Conclusion

The responsibilities of management and auditors are distinct yet interdependent. Management must establish robust internal controls and foster an organizational culture that treats ethical compliance as a genuine priority rather than a formality. Auditors, for their part, must maintain strict independence and fulfill their watchdog function without yielding to management pressure. The corporate scandals of 2001 exposed the high cost of blurring these boundaries, while the reforms that followed — particularly the Sarbanes-Oxley Act — demonstrated that restoring public trust requires both structural reform and a renewed professional commitment to integrity.