Corporate Governance is often refers to as the system that directs and controls limited companies. (Mclaney and Atrill, 2005). Corporate governance is a term with a broad meaning ‘that has to do with ... the rights and responsibilities... shared among owners, managers and shareholders of a given company’ (Tatum, 2010). Further explanation of the term stated by the OECD Principles of Corporate Governance explained that the term “... involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” Where as Sir Adrian Cadbury (1992), cited by Yener (2002), the author of ‘The Financial Aspects of Corporate Governance’ defined the term as “... holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of these resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society. The incentive to corporations is to achieve their corporate aims and to attract investment. The incentive for states is to strengthen their economies and discourage fraud and mismanagement.” However, the sole purpose of corporate governance is ‘to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company’ (The UK Corporate Governance Code, 2010). Therefore, corporate governance is a code that guides and enforces ‘the sustainable success of an entity over the longer term’ in which this is set against what the board of the company does and the values of the company. Being initiated from a number of key factors, ‘It is based on the underlying principles of all good governance: accountability, transparency, probity...’ (The UK Corporate Governance Code, 2010). With such a complex meaning, corporate governance is one of many key elements which improve economic efficiency. This is because the structure of corporate governance is subject to legal and regulatory policies. Therefore, this allows relationships between the boards of directors, the management of the company and the company’s shareholders as well as other stakeholders such as customers and suppliers (Yener, 2002).
However, this essay is going to focus on the concerns on whether auditors play an important role when it comes to corporate governance. With many characteristics, corporate governance is a concept that is vital to a company as duties and obligations of an external auditor to ‘review and monitor ... the effectiveness of the audit process...’ falls under section C of the 2010 UK Corporate Governance Code. External auditors are often qualified accountants that work independently on behalf and in the interest of the shareholders of a company. Working in partnership with directors, auditors’ main duty is “... to make a report as to whether, in their opinion, the financial statements do what they are suppose to do, namely show a true and fair view of the financial performance, position and cash flows of the company by complying with relevant accounting standards and statutory requirements.” Mclaney and Atrill (2005: p. 157)
In other words, auditors are required to check the company is following correct accounting standards such the ISA 10 Cash flow statement, for example, in which they have the power to identify any unlawful activity going on in the company. In fact, according to Peel and O’Donnell (1995) cited by Krishnan (2007), ‘auditors can only play their role effectively if they are independent’. Having a significant role in maintaining good corporate governance within a company (Ali, 1999 cited Krishnan, 2007), they...