Abstract
Auditors have an important role in corporate governance, but they are not part of a firm’s management, which consists of the board and the chief executive officer or the general manager. They are not, legally speaking, ‘agents’ for the members of the firm either, although they are often elected by members. On the other hand, auditors are not agents for the management either, despite their fees being based on a contract between themselves and the management – acting on behalf of the firm – whose work they scrutinize. In the case of firms with societal importance in particular, they are seen as guardians of public interests, albeit not directly, by communities of people and institutions relying on auditors’ work (including the state in its many roles). They are also seen as guardians of public interests in a more abstract way, given that auditing contributes to the reliability and orderly functioning of markets and society generally by enhancing the integrity and efficiency of corporate information. In this way, auditors fulfil a particularly important societal role. This role can be also seen as one that ensures accountability to a firm’s non-member constituencies.
In these roles, they have an important role in following up on the compliance of rules that ensure good corporate governance. Traditionally, research into auditing in corporate governance has focused on how corporate governance affects auditing, rather than how auditing affects corporate governance. However, the abovementioned regulatory framework shows that the role of external auditors reflects the increasing focus on corporate governance and internal control on the part of companies and regulators, and also the heterogeneousness of the auditor role.
In this chapter, I discuss in more detail the different roles of auditors in governance of different kinds of firms, both large and small, multinational and local. What is common to all firms is the auditors’ task of maintaining both the cooperation of the management and their oversight, or in other words, the informal and formal role of auditors in corporate governance structures. I limit the discussion here to external auditors, although internal audits and compliance are no less important. Indeed, successful management requires both.
I pay special attention to auditors as overseers of firm management, how they fulfil this role in different kinds of firms, the kind of regulatory framework within which this role is fulfilled and what effect their involvement is likely to have on corporate governance. The main question to be answered is whether the auditors are enhancing good corporate governance and whether this could be done (even) better. The latter part of the question is approached through discussion of the scope of the audit, for example, will it be focused on financial reports only or will the auditors also audit reports on management, governance, environmental and social impact of undertakings.
The focus in in this chapter is on European Union legislation on audit and auditors, including the European Commission proposal for a directive on sustainability reporting, expanding the duties of auditors to encompass audits of sustainability reports.
Preprint available at: https://ssrn.com/abstract=4224255