Customers and shareholders come in for a big shock when their stocks go down in value or a company goes bust in spite of showing profits the previous years. Although there are many reasons as to why a company might go bust, bad or irregular auditing which had inflated the actual position of the company finances is also a major reason. External auditing houses were hired to solve the problem of false or tampered internal auditing. However the position of external auditors and external auditing firms is also controversial. Although external auditor bring in credibility to a company’s accounts and financial health, the fact that they are hired by the company and that they could be biased cannot be discounted. There needs to be an accounting oversight board that looks into all the auditing firms without bias or there should be a nationalization of auditing houses so the company accounts would be credible.
In theory, it is accepted by and acknowledged by most people that having an external auditor to manage the finances of a company spells good corporate governance. In many cases, external auditors improve the accountability as well as the transparency of a company’s account and reduce agency problems. Shareholders and other stakeholders of the company and its finances are relieved to find that there is an external agency that looks after the finances of the company. They bring in credibility to a company. The credibility of a company falls when it does not employ an external auditor and only employs internal auditors. This raises the doubts among shareholders that something is wrong. In order to overcome the problem of credibility of financial statements, an auditor who is independent of the management is appointed to investigate the information in the financial statements and report his findings to the shareholders (Millichamp, 2010).
Hiring an external auditor however does not solve the problem completely. Auditors Are liable to compromise on their professionalism, integrity and objectivity for financial gains and further work. These actions of the auditors and auditing houses has brought into focus the credibility of not only the company’s accounting but also the credibility of the external auditor. It is not only the financial gain aspect that hurts the work of an auditor but also other factors such as company and public expectancy which can clash at times and the audit market cartel. A report by the competition commission in the UK found that that only four auditing companies did 95% of the work for 350 Fortune companies. This means that there was no competition and that these companies through their donations to political parties enabled laws that were favorable to them (Sikka, 2013).
Until the Sarbanes-Oxley Act was passed in 2002, there was no accounting oversight board. Company audits were presented by the internal auditors or external auditors and were accepted as they were or were reviewed by peers. The Act was a result of the numerous accounting scandals in major corporations such as Enron and Worldcom. After the board came into existence numerous faults were found in company accounts-big and small. It happened even with companies that had hired an external auditor. Dave Albrecht, Associate professor of accounting, Concordia College says that there is a compromise by the external auditing firms because they are hired by the company and are prone to biases. He calls for a complete reinvention of the audit function and calls for a nationalization of the audit firms to deal with the problem of bad accounting (Top 100 Extra, 2011). Since the market is dominated by the big four- PricewaterhouseCoopers, KPMG, Deloitte and Ernst & Young, there is little place for competition and little chance for the small auditing firms to get more companies. Big auditing firms collect millions in fee and usually give a report that is favorable to the company. Many banks and companies that were given a favorable report went bust soon after. Auditing companies had a role to play in the 2008 financial crisis as well.
The shareholders are only privy to the audit reports that the company shows them. They have no means to verify the quality of the report that is given to them. They are not also told about the contract with the auditing firm, the audit files, tenders given out or the suspicions that the auditing firm might have had about the company in question. The assurances and documents given by the company to the auditors are also not shown to the shareholders. In case of any complaint by the auditing firms, the government takes years to investigate it. Even when the auditing firms are finally penalized, the fined that are levied on them are not anywhere close to the millions they make for their accounting job. When there is no competition and oversight , there is boredom and lethargy on the side of the auditors. They fail to do their work and can always get away with saying that they did. There is also the problem of falsifying reports and showing that work was done when nothing was actually done. Since in many cases the big auditing firms get away with their sloppy work, there has developed a culture of bad work ethics in the auditing firms. These firms would get paid no matter what. Sometimes they will only have to sign the accounts and and auditing reports that are given to them by a company. A company can work out their accounts with internal auditors and give it to the external auditors just to maintain a semblance of credibility.
The only way to get rid of these auditing problems is to break the monopoly held by these four companies and open up the market so that small auditing firms could compete for bigger clients. More competition among the auditing firms could bring in better auditing. The role of an external auditing form is such that it is not held accountable to anyone except the company that it represents. It does not have a direct stake in the shareholders or the general public who might be affected by the company’s performance. This enables the auditors or the external auditing firms to do a bad job at accounting and get away with it. They get their fees for bringing out a report that would show the company in a good light and get out of the picture. This is controversial because as long as they show good reports they would get paid but would not be held liable for their actions. The company would be wound up and the public will lose their money but the auditing and accounting firms would still be in business. Laws should be framed that would make the external auditing firms liable to any financial misdeeds the company or the bank is up to. Nationalizing auditing firms would also lead to proper auditing and an unbased overview of accounting.
There are people who are satisfied with just the role of an external auditor to maintain the credibility of a company and its financial statements. However there are also others who believe that the role of an external auditor is compromised due to financial motives and other factors. These opponents to the role of external auditors as the final level of auditing call for a central auditing boards that would have an overview of all the auditing houses or the nationalization of auditing houses. Some also suggest that auditors should be sued for negligence. Accounting and auditing process will always be open to temptations from outside, especially money. Loopholes would always be found to doctor company accounts. Unless auditing firms are nationalised the only hope for a good accounting practice is to hope that the auditors put morality before making money. Nationalizing auditing firms could be a controversial move, but it is a move in the right direction for reforms to be made in the accounting world.
Works Cited
Millichamp, A. Auditing. 8th edition. London: Continuum. 2002.
Sikka, Prem. “The uncompetitive culture of auditing's big four remains undented.” The Guardian. 23 Feb, 2013. Web. 18 Mar, 2016.
“Top 100 Extra: Issues Facing the Profession.” Accounting Today. 9 Jan 2011. Web. 18 Mar 2016.
