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Journal of Finance and Accounting ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol 3, No 9, 2012

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The Role, Compromise and Problems of the External Auditor in Corporate Governance* James O. Alabede Department of Accounting, Federal Polytechnic Bauchi, Nigeria, E mail: joalabede@yahoo.com Abstract This study reflects on the role, compromise and problems of the external auditor in the corporate governance with particular reference to the UK. The external auditor is an independent person or firm of auditors appointed by the shareholders to investigate the financial statements prepared by the management and report his findings to the shareholders. This study identifies the various instruments used by government and accountancy bodies to regulate the role of the auditor. The statutory role of the external auditors is to issue audit report of his opinion on true and fair view of the financial statements. The study indicates that the role of the external auditor is greatly facilitated by efficient and effective internal control system and with the cooperation of the audit committee. However, the study provides striking evidence that in the course of the audit role, some auditors compromise their professional integrity for economic gain. The big four firms provide a better picture of the professional compromise. Alongside this, it identifies corporate accounting scandal linked to the professional misconduct of the auditors. Furthermore, the problems frustrating the effective role of the auditor within the framework of the corporate governance were identified in the study as auditor’s independence, morality, public expectation and audit market cartel. In conclusion, the study shows that the role of the external auditor is inevitable for good corporate governance. However, to have effective role of the auditor, it is recommended among others that the regulatory body should be directly involved in the appointment of auditors of large companies. Keywords: Corporate governance, External auditor, Accounting scandal, Big four audit firms 1. Introduction Within the framework of the corporate governance, management is responsible to prepare the annual financial statement detailing the operating results as well as the financial position of a company. The financial statements are presented to shareholders to account for the stewardship of the management. However, such financial statements may lack credibility and shareholders may hardly believe the information contain therein. 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 (Al-Thuneibal et al., 2011; Millichamp, 2010). In performing this role, the auditor fosters the trust of the public and encourages them to believe that the financial statements are true and fair (Sikka, 2009). However, following numerous cases of corporate scandal, some, which were linked to the negligence or involvement of the auditors, the public confidence in the financial statements has been eroded (Pflugrath et al., 2007; Percy, 1997; Sikka, 2008a & 2009) and the role of auditors in eliminating agency conflict is being doubted. This paper examines the role of the external auditor in corporate governance and to achieve this objective the remaining parts of this paper are divided as follows: the second and third part discuss the place of audit in corporate governance and regulation of external auditing respectively. Part four examines the statutory role of the external auditors while fifth and sixth part focus on how auditor’s role is supported by internal control system and audit committee respectively. Part seven is on the role of the big audit firms while high profile corporate accounting scandal is discussed in part eight. The problems of external auditors are addressed in part nine and this is followed...
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