Corporate governance differs significantly from the operational and managerial activities carried out by companies' executives.
The need to separate ownership from control creates an avenue for divergent interest between shareholders and management, thus bringing to bear the risk to investors that management may likely misuse the resources entrusted to them and act in their self-interest.
To increase shareholders' confidence, an auditor is required to give an independent opinion on a company's financial statements under specific laws or rules. Users of the financial report, such as investors, government agencies, and the public, rely and make economic decisions based on an auditor's independent and unbiased opinion.
Good corporate governance is sin-qua-non to the success of an organisation, as corporate governance is at the heart of investment decisions, and investors put corporate governance at par with financial indicators when evaluating several investment decisions.
Within the confines of corporate governance, management is responsible for preparing the annual financial statements detailing the company's operating results and financial position. The financial statements is presented as a means of accountability and management stewardship; however, such a financial statements may lack credibility, and shareholders may have difficulty relying on the financial statement or the credibility of information contained therein.
Corporate governance is not an end but a means to an end. Thus, to severe the problem of credibility of the financial statement by the shareholders, an external auditor is appointed who is independent of the management to audit the information provided by the management in the financial statements to ensure that it gives a true and fair view of the financial position and performance of the entity.
Accruing Benefit of Good Corporate Governance To Business Entities.
As the term denotes, corporate governance is a set of rules on how a company decides to govern itself by providing direction and control toward achieving its objectives. Good governance means that your business's processes are targeted at producing results that meet society's needs and organisational prosperity while strategically using its available resources.
Good corporate governance acts as a critical focus area for businesses to position themselves favourably to withstand a challenging economic climate. Some of the benefits of good corporate governance includes:
- Creates a workable framework for achieving business goals: When decisions are made with consideration of significant stakeholders such as employees, suppliers and the community alike, it creates a broader vision for successful results, since every stakeholder have valuable involvement that produces a culture of accountability, generating a higher potential to reach objectives within an organisation.
- Provides opportunity towards greater competitive advantage: Industries are constantly evolving, thus adopting good governance can create an environment where standard practices adopted are sustained.
- Investment opportunities: Corporate governance enables an organisation to attain some degree of stability and reliability, which increases its chances of attracting premium investors and access to funds at a better rate.
- Guidance towards effective decision making: Good corporate governance help build a culture of transparency in any organisation, thus aiding informed decisions that can rapidly improve performance and mitigate the effects of potential failures.
- Reputation, morale and legacy building: Through corporate governance, an organisation can enhance its identity, which helps to build its reputation and legacy upon which stakeholders and potential investors place increased levels of trust, thus allowing users to develop more assertive, and longstanding relationships.
- Enhancing success rate for financial performance and sustainability: Good corporate governance aims to assist in the speedy identification of issues and reaching decisions to resolve these potential issues, thus reducing the eventuality of a crisis and its accompanying cost.
- Talent attraction: Corporate governance allows an organisation to build a working environment and transparent processes, allowing for a high degree of fairness and accountability, which in turn creates a greater sense of responsibility and awareness as to where they are expected to create value within an organisation.
The External Auditors and Corporate Governance
External auditors play a key role in corporate governance framework, and they ensure that the board of directors and management are acting responsibly towards the shareholders' interest. The external auditors, by keeping objectivity, can add value to the shareholders and ensure that the company's internal control is solid and practical.
The external auditor, as a pre-requisite, must be independent of the management yet has oversight of management and sometimes provides support to management on a different task. The roles of an external auditor in ensuring good corporate governance are as follows:
- Issuance Of Audit Opinion: Basically, the statutory role of external auditors is to issue an audit opinion on the true and fair view of the financial statements for use by the shareholders and other stakeholders. Hence, the external audit is one of the cornerstones of corporate governance. It provides an external objective check on how the financial statements has been prepared and presented and a means through which shareholders monitor and control management, thus enhancing transparency in a company. It is therefore imperative to appoint an independent expert to audit the financial statements.
- Evaluation of Internal Control: Internal control assessment is critical to the discharge of the auditor's duty. Such an opportunity will allow the auditor to understand the client's environment and help to decide on the appropriate audit plan to adopt. Auditors are expected to communicate any form of weakness to management via a Letter of weakness of internal control in accordance with ISA 400.
- Accountability: Research has revealed that evaluating control and operation, which is a duty of external auditor, enhances corporate governance. External auditors introduce measures and policies that compel accountability. For instance, if the financial statements prepared by management is manipulated through inflation of figures, an external auditor could recommend penalties for such activities and provide recommendations to curb reoccurrence.
- Representation of Shareholders Interest: One of the roles of an external auditor in corporate governance is to protect the interests of the company's shareholders. This is usually achieved through the independent report of the auditors, which are not influenced by the management. External auditors are required to state the organisation's finance position and performance, and attest to the validity of the financial reports.
- Risk Assessment and Mitigation: External auditors help promote corporate governance by conducting a risk assessment. Risk assessment is usually performed to identify grey areas and review the mitigating measures that a company has in place against corporate fraud or corruption.
In a bid to assess potential risk, auditors also analyse the overall risk tolerance of the company and the effort the company has made towards mitigating such risk.
- Crisis Management: Crisis management allows management to assess its effectiveness, scope, completeness and readiness if emergency plans need to be implemented. Crisis management also brings to the limelight internal controls and deficiencies that may hamper the implementation of emergency plans and the accompanying impact on the reputation and brand of your company.
The external audit process will allow companies to build on their crisis management plan and provide detailed feedback to evaluate the internal resources and adjust accordingly to meet the planned objective and implementation.
- Strong Relationship With Regulators: External auditors make an effort to foster a good relationship with regulators. For an entity that maintains a transparent operating system, the regulators tend to be supportive of them. Once an external auditor evaluates an entity's record and attests to its disclosure, the regulator tends to show trust and confidence towards them.
Corporate governance focuses on promoting transparency and fairness within an organisation through performance monitoring and ensuring accountability. In that regard, external auditors serve as a primary tool and protector of corporate governance in any organisation.
The role of an external auditor is crucial in achieving the objective of corporate governance. The external auditors are responsible for auditing the company's financial statement and providing reasonable assurance that they are presented fairly in conformity with the required standards. Auditors must also express opinions on the implementation and design of the internal control system, ensure credibility to financial reports, and reduce the risk that information disclosed in the financial statements is biased, misleading, inaccurate, incomplete, or materially misstated.