Various scandals across Europe have forced regulators to tighten rules that govern the appointment of external auditors and the auditing process. The Enron scandal, scandals at WorldCom and Global Crossing and the collapse of Arthur Anderson provided a platform for tightening of rules governing auditing process to avoid reoccurrence of the events (Cray and Lee 305). In UK occurrence of many scandals initiated formation of corporate government framework. Among the scandals witnessed in the United Kingdom include names such as Polly Peck, Robert Maxwell, and BCCI. To protect companies from the occurrence of scandals that may result in their collapse UK government created the financial reporting council(FRC) that had a mandate of regulating accounting and audit profession (Humphrey, Anne and Margaret 815). The primary aim of an external audit is to develop an opinion on truth and fairness of a company's financial statement.
Under companies act the company's shareholders appoint auditors of various companies at the annual general meeting (Parker 60). This system is useful because it prevents corruption that may arise during the appointment period. The directors will propose their list of external audit firms to undertake the audit process to the shareholders, who then choose the best firm to do the audit process based on merits and not personal favors
Following the Parmat scandal in Italy and later the Ahold scandal in Netherlands, an audit directive was created which applies to all companies in the European Union (Knapp and Carol 645). Disclosure and transparent rule in the UK were a result of the audit directive. It aims at providing accuracy of statutory account in the United Kingdom. The disclosure and transparent rule requires each company to appoint an audit committee and continuously involve the audit committee during the appointment of auditors (Ho and Kar 142). This rule is of far more significant in the audit process as it creates transparency in the selection of audit firms and ensures that there is no repetition of scandals that would otherwise paralyze the economy.
The current UK code requires companies to appoint an audit committee (Collier 425). This committee is a crucial committee in the audit process as it has the mandate to appoint, reappoint or remove an external auditor. Audit committee is an appropriate response to the ever growing financial scandals all over Europe and in the UK because this committee is responsible for facilitating company's relation with the external auditors. It has well-trained audit professionals who understand the key metrics in determining the most appropriate audit firm and how to conduct an efficient audit process for the organization (Collier 428).
Shareholders have a role in assessing the work of the shareholders annually to determine their effectiveness in performing their duty. The audit committee prepares a report on the audit process and delivers them to the shareholders to look into and make decisions based on the findings and recommendations of the report given. The report will describe the effectiveness of the audit process and the criteria used to appoint, reappoint or remove an external auditor. Analyzing of the report by the company's shareholders ensures that the audit committee performs its mandated by the law and does not favor any given group of external auditors to conduct the audit.
I think that mandatory rotation of the panel should be earlier than 20 years. Rotation of the audit team results in the creation of new ideas by the new committee that will ensure the proper financial success of the organization.it will also limit the element of favor in the appointment of new external audit firm as a result of rapport between the audit committee and the company in question. New committee created will not have any ties with the external audit companies and hence will perform their duties impartially. Financial Reporting Council should not have a greater role in the appointment of external auditors the work should be left to the audit committee as they are well-trained individuals and have close links to the company.
I recommend that the government sets rules and regulation to govern fair competition by the audit firms. Large audit firms who control the market must receive competition from other firms to ensure improvement in quality of service offered. Furthermore, rules should be implemented to allow mandatory firm rotation during the audit period.
Work cited
Collier, Paul. "Factors affecting the formation of audit committees in the major UK listed companies." Accounting and Business Research 23.sup1 (1993): 421-430.
Cray, Charlie, and Lee Drutman. "Corporations and the public purpose: restoring balance." Seattle J. Soc. Just. 4 (2005): 305.
Ho, Simon SM, and Kar Shun Wong. "A study of the relationship between corporate governance structures and the extent of voluntary disclosure." Journal of International Accounting, Auditing and Taxation 10.2 (2001): 139-156.
Humphrey, Christopher, Anne Loft, and Margaret Woods. "The global audit profession, the international financial architecture: Understanding regulatory relationships at a time of financial crisis." Accounting, organizations and society 34.6 (2009): 810-825.
Knapp, Michael C., and Carol A. Knapp. "Europe's Enron: Royal Ahold, NV." Issues in Accounting Education 22.4 (2007): 641-660.
Parker, Robert Henry. "Regulating British corporate financial reports in the nineteenth century." Accounting, financial and Business History 1.1 (1990): 51-71.
