Does an Audit contribute to Better Governance

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Audits are part of the governance process in companies. However, no governance system, however well designed, will fully prevent greedy, dishonest people from putting their personal interests ahead of the interests of the companies they manage. Frauds can be covered up by withholding information or fraudsters using low quality auditors to perpetrate and perpetuate fraudulent practices. Therefore, just because of mismanagement, one should not underestimate the value of audits, instead you should make it valuable to the company. Many steps can be taken to improve audit quality and corporate governance to reduce opportunities for fraud.

To meet its obligations to shareholders, the board must ensure that it receives relevant and reliable information and appoints appropriately qualified independent auditors for the job. The board can use auditors to report on the accuracy of information provided to them by auditing the R2R process. Record to Report or R2R is the management process for providing strategic, financial and operational feedback to understand how a business is performing. If this is misstated intentionally or otherwise by management the board will be misled. Many instances of misreporting of financial information that caused significant losses could have been prevented this way.

There must be open and honest dialogue between the auditors and the board. This would help the auditor to understand the board’s concerns and assist them in achieving their goal, through an effective audit process.

An effective audit committee is a vital component of an effective corporate governance system. It’s not necessary that such an audit committee should only be formed in listed companies. The Audit Committee and the auditors should maintain an ongoing dialogue independent of management and the rest of the board to address all significant matters affecting the financial statements, in the audit.

The auditing profession has an important role to play,as well. It should have a monitoring process in place to keep the auditors in check. If professional standards are not followed by audit firms the professional body should punish those who don’t meet such requirements. This will prevent low quality audits and increase market confidence in audits and auditors. Further, the auditors who are objective, independent and reporting on the factual status will not fear losing their client to a non compliant auditor.

Many such initiatives taken together will no doubt contribute to better governance.

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About surenraj

“Views expressed are my own”
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