The Role of Auditors in the Context of Corporate Governance

Topics: Audit, Corporate governance, Auditing Pages: 14 (4975 words) Published: September 17, 2011
Asst. Prof. Loganathan Krishnan
Abstract Auditors examine company’s accounts and report to the company on the accounts. Fundamentally, the concern is how auditors carry out these duties effectively. Legislations namely Companies Act 1965, Securities Industry Act 1983 which has been consolidated as Capital Market and Services Act 2007 have made major inroads to ensure that auditors carry out their duties and obligations effectively. Additionally, the Code of Corporate Governance was drawn in 2001 and amended in 2007, to further enhance the effectiveness of audit in the interests of stockholders and stakeholders. Nonetheless, it is pertinent to determine whether the Code of Corporate Governance is adequate and comprehensive in ensuring that auditors play effective role in auditing a company. This is particularly imperative in the light of recent scandals involving auditors in Malaysia and in other parts of the world. The study then proceeds to explore the appropriate litmus test in laying down sound principles governing the duties and obligations of auditors. This is crucial because there is increased reliance by the stockholders and stakeholders on auditors. Moreover, there is a growing concern for corporate governance domestically, regionally and globally. Thus, a comparative study is also carried out as to how the issue of corporate governance is addressed in other parts of the world. Finally, the study shows that the Malaysian Code of Corporate Governance governing the duties and obligations of the auditors has not produced the desired result pertaining to accountability. Field of Research: Corporate Governance, Auditors KA 601 Department of International Business Faculty of Accountancy and Management Universiti Tunku Abdul Rahman Sungai Long Campus, Lot PT 21144, Jalan Sungai Long Bandar Sungai Long, Cheras, 43000 Selangor, Malaysia Tel: 03 90194722 Fax: 03 90197062 E-mail:

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1. Introduction
This study examines the role of auditors under the Code of Corporate Governance. The study then reviews the financial scandals involving auditors which occurred within Malaysia and in other countries. In reviewing the scandals, this study will investigate the cause for such scandals. The study will show whether the auditors’ duties and obligations as provided by the Code are comprehensive in addressing the scandals.

2. Auditors and Corporate Governance
Corporate governance is an internationally debated interdisciplinary concept with many characteristics (Nobel, 1998). However, the concern is whether in the context of corporate governance, auditors play an important role. This is vital since the duties and obligations of the auditors fall under the purview of Part III of the Malaysian Code of Corporate Governance which was originally drawn in 2000. Auditors are given wide powers to enable them to detect wrongdoings by the management. They are expected to be independent of the company and report on the company objectively. In fact, auditors can only play their role effectively if they are independent (Peel & O’Donnell, 1995). The auditors are able to remove management’s biasness as regards to the presentation of the company’s financial information (Carmichael, 1977). They can report to what extent the company practices corporate governance. They are expected to play a significant role in maintaining good corporate governance (Ali, 1999). They must ensure that good corporate governance practices are adopted (Anandarajah, 2001). They must act as the guardian of the company’s financial integrity. This is because an effective and objective audit is an essential part of corporate governance (Low, 2002). This is to ensure that the legal position is in tandem with international standards in the realm of corporate governance. Thus, it was correctly stated in Simonius Vischer...

References: Ali, R. 1999, ‘The rules of good corporate governance: Methods of efficient implementation’, Proceedings of the 12th Commonwealth Law Conference, September 1999, Kuala Lumpur.
‘A murky sort of pond life’, 2002, Economist, 7 June, p
McKinsey & Co, 2002
‘Steps to improve accounting firms’, 2007, New Straits Times, 27 July, p
List of Cases Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN (NSW) 29 Simonius Vischer & Co v Holt (1979) 2 NSWLR 322
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