Corporate audits and how to fix them

Article Type: Abstracts From: Strategic Direction, Volume 27, Issue 4

Ronen J.Journal of Economic Perspectives, 2010, Vol. 24 No. 2, Start page:189, No. of pages: 22

Reviews the practice of auditing and the work of company auditors from the particular viewpoint of the structural weakness of this practice whereby auditors are supposed to be watchdogs, assuring a flow of accurate information to investors, but have tended in the past to be more interested in serving the companies they audited since the auditing profession is based on a system whereby auditors are paid by the companies they audit. Outlines the practice of audits, the auditing profession, and the problems that auditors continue to face in terms not only of providing high quality audits, but also in providing audits that investors trust to be of high quality. Describes a number of reforms that have been proposed, including ways of building reputation, liability reform,capitalizing or insuring auditing firms, and greater competition in the auditing profession. Concludes that none of these suggested reforms, individually or collectively, overcomes the basic weakness breaks of the agency relation between the client management and the auditors, and the conflict of interest continues to threaten auditors’ independence, both real and perceived, although such weakness can be mitigated by some of these reforms. Proposes an approach for financial statements insurance which would redefine the relationship between auditors and companies in such a way that auditors would no longer be beholden to management.Article type: Literature reviewISSN: 0895-3309Reference: 39BB568

Keywords: Auditing, Finance and accounting, Financial reporting, Organizations