Write an essay on Corporate Governance?
This particular study is based on corporate governance and the role of the auditors in determining the level of corporate governance. This particular research highlights the corporate governance of an organization as identified from the perspectives of effective audit responsibilities and level of independence implemented on the auditor. This particular highlights the sub divisions like Research overview that will state the entire proceedings of the research that will highlight how the auditors of a company or appropriate audit function will derive better corporate governance of an organization. The problem of the research will highlight the problems that are faced by the company’s auditors or the management of the companies to derive better corporate governance (Acharya et al. 2013). This will also highlight how improper corporate governance deteriorates the business relationship between the company and the other stakeholders of the company.
The aims and objectives of the research will point out at the reasons that influenced the researcher to conduct the research on the particular topic. The Research questions will highlight the answers of the questions formed based on the research topic. The research framework will highlight the hypothesis that will be formed to conduct the research in a systematic manner. The research method will point out the specific pattern of research that will be used by the researcher to conduct the research, specifically the procedure of collecting data for research. The research hypothesis identifies the statement created by the researcher in order to speculate the outcome or result of the research.
Corporate governance has been one of the most important aspects for all organizations and auditors play an important part in order to ensure that the financial expenses and earnings (invested amounts) are totally balanced and are fairly represented in the financial statements (Aebi, Sabato and Schmid 2012). This particular research comprises of five different chapters consisting of introduction that will describe the research overview, problem, aims and objectives, research questions, research framework, research method, hypothesis and scope of the research. The review of the literature will comprise of the different topics related with the topic corporate governance and roles of auditors as well as the roles that the management of a company will play in order to ensure better audit process. The role of the companies towards improvement of audit responsibilities is also discussed in the section. Research methodology highlights the processes that are applied by the researcher in order to conduct the research in an appropriate manner.
Research methodology will highlight the research paradigms, research approaches, research techniques, data collection process, data analysis, accessibility issues, ethical considerations and time scheduling (Bierstaker et al. 2012). Analysis of data will highlight the process that will be identified by the researcher consisting of thematic analysis of relevant articles based on the topic of corporate governance and role of auditors. The final chapter will consist of conclusion and recommendations. This chapter will depict linking objectives with the research, scope of the research, limitations of the research and future scope of the research.
In order to highlight the problem of the research on the topic role of audit committee and corporate governance, it can be stated that majority of the companies have failed to exercise effective control on the audit committee. In order to prove that effective control on the audit committee without interfering the process of audit will be applicable to derive positive outcomes for the organization.
The objectives of the research are stated as follows:
To find out the role of audit committee towards Corporate Governance
To evaluate the role of the audit committee on corporate governance mechanisms
To establish the relationship between audit fees and auditor independence and its effect on corporate governance issues
The aim of the research is to find out and evaluate whether the audit committee has positive roles to play in order to increase the rate of corporate governance as well as to evaluate the roles and responsibilities of the audit committee on the mechanism of corporate governance. An effective relationship between audit fees and independence of auditor will be identified, which will be helpful to evaluate whether effective corporate governance established if the auditors of an organization are not carrying out the audit responsibilities independently and are deprived of their fees.
The questions of the research are stated as follows:
How the roles of audit committee are directed towards corporate governance?
How role of audit committee is evaluated on corporate governance mechanisms?
How relationship between audit fees and auditors’ independence effect the level of corporate governance of an organization?
In order to proceeds with the research effectively and with the aim of identifying the objectives of particular research, a research framework is required in order to identify the Independent and Dependent variable of the research in an effective manner. The independent variables are identified as the autonomous factors and gradually lead to the identification of the independent variable. In this particular research, corporate governance is the dependent variable and the roles of the auditors are the independent variable that will control the outcome or the effect of corporate governance of an organization.
An appropriate research method is used in order to conduct the research in the best way possible. This particular research being secondary in nature, hence, use of thematic analysis will be required that will comprise of carrying out the research work based on the different journal articles prepared on roles and responsibilities of auditors and corporate governance of the organization.
Setting of hypothesis will assist the researcher in order to find out the usability and applicability of the dependent and the independent variables identified in the research. Three hypothesis will be set for the research. These are stated as below :
Hypothesis 1: Corporate governance and role of auditors
H0: Corporate governance is dependent on the roles played by the auditors of the organization
H1: Corporate governance is not dependent on the roles played by the auditors
Hypothesis 2: Corporate governance and effective control of the management
H0: Corporate governance is completely dependent on the effectiveness and control of the management
H1: Corporate governance is not dependent on the effectiveness and control of the management
Hypothesis 3: Audit fees, roles of auditor and level of corporate governance
H0: Auditor’s are dependent on the fees and therefore effective corporate governance is possible on better auditing capabilities of the auditors
H1: Auditor’s are not dependent on the fees and therefore effective corporate governance is possible on better auditing capabilities of the auditors
In order to identify the scope and the significance of the research, it is essential to identify the roles of the auditors and how the outcomes of an independent audit report affects the corporate governance of an organization. Moreover, this particular study will highlight how the management of the organizations can take effective control on the audit committee in order to present a valid financial statement in a true and fair view to ensure satisfaction of the stakeholders, especially the investors and the customers.
This particular section of the research will comprise of evaluation of the related factors that are coinciding with the topic of the research. This particular chapter will highlight the related information of the views and topics that relates with effectiveness of corporate governance and the roles that are played by the auditors for deriving truth and fairness of financial reports.
The review of the literature describes, summarizes and evaluates then theoretical base of the study carried out on the selected topic.
The term corporate governance is defined as the systems, rules, processes and the practices that is directed and effectively controlled by a company (Brown et al. 2012). This particular term induces involvement of balancing the interests of the related stakeholders of the organization, including the management, customers, shareholders, investors and the community (society) as a whole.
Basically corporate governance is a framework of rules by which the board of directors of any company ensures fairness, accountability and transparency in their business. Through corporate governance companies maintain a fair relationship with their stakeholders like customers, employees, shareholders, government and community (Cassell et al. 2012). The framework of corporate governance may consist of explicit and implicit relationship between the company and its stakeholders in the context of distribution of responsibilities, duties and rewards. The process helps in reconciling sometimes conflicting concern of the stakeholders in the context of their privileges and duties.
Corporate governance can also be referred to as a procedure of supervising controlling and sharing information of the organization to their stakeholders that act as system of check and balance. Corporate governance encompasses almost every aspect of management from internal operation to corporate disclose and performance measure of the organization (Tricker 2015). It is true that the ultimate objective of any company is to earn profit, but nowadays it should not be enough for the company to be merely profitable; it should also demonstrate high level of corporate governance by ethical behavior and environmental awareness (Cassell et al. 2012). Majority of the organization strive to maintain a high degree of corporate governance. Corporate governance is the field in economy which investigates secure management of the organization in terms of legal and environmental factors. The concern of corporate governance is to hold the balance between the economic and social goal of the organization.
The roles of the audit committee of an organization are comprised of the board of management and director that controls the entire audit responsibilities of the concerned company for better corporate governance (Christensen et al. 2015).
Audit committee can be referred to as an operating committee that is comprised of board of directors and they are charged with supervision company disclosure and financial report. Audit Committee is drawn from the member of board of directors and a chairperson is selected from this committee (Claessens and Yurtoglu 2013). Many Audit committee of corporate governance supervise the corporate compliance and risk of the organization. Role of audit committee towards corporate governance has been explained below:
Role in supervising the financial report: It is the typical duty of the audit committee to review the financial statement of the organization either annually or quarterly. Members of audit committee often tend to discuss the complex estimate if accounting and decision made by the management of the organization (Li, Mangena and Pike 2012). The Audit committee also discusses the implementation of new policies in the organization in order to decide whether it is right or wrong for the organization. The committee also discuss with the senior financial management such as CFO regarding this financial report (Cohen et al. 2013). The committee also has right comment on the financial management of the organization.
Supervision of External Auditor: Audit committee has to give approval in selecting the external auditor who will give reviews on the financial report of the company. External auditor issue an opinion regarding the accuracy of the annual financial statement of the organization (Hermalin and Weisbach 2012). In order to change the external auditor, the organization has to take approval of audit committee. Audit committee also ensures that external auditor remain independent so that no conflict exist in the interest of auditors.
Supervision of the regulatory compliance: Audit committee also discusses the regulatory compliance risk of management generally by the report of company’s top layer. Large organization may also have compliance officer who will be responsible for supervising regulatory compliance of the organization.
Supervision of risk management: Organizations have several functions to perform the activities that will identify the risk of the organization. It identifies the risks that threaten the goal of the organization (Aebi, Sabato and Schmid 2012). The policies used in identifying, prioritizing, and responding to the risk are typically analyzed by the audit committee.
Supervision of internal control: The audit committee of the organization is responsible to supervise the policies and procedures that are used to control the operation, regulatory compliance and accounting of the organization. The audit committee must ensure that internal audit report provides a fait picture of the organization.
Figure: Audit committee of corporate governance
(Source: Erkens, Hung and Matos 2012)
Management of an organization must be effective in controlling and managing the responsibilities of the audit committees and must ensure that the auditors are able to perform their responsibilities in an independent manner (Gao and Kling 2012). The roles of the management of a company are to be discussed regarding the process of exercising effective control on the employees.
The board of directors has the entire responsibility of managing corporate governance in the organization. The management has to exercise the strategic oversight the operation of the organization. The management directly monitor, measures and reward the members of the corporate governance team (Larcker, Reiss and Xiao 2015). It is the management who will ultimately ensure the integrity financial report system and accountability of the organization. The senior manager would be responsible to oversee the process of communication and disclosure of corporate governance. It is the responsibility of the management to guide the strategy of the business. The management also has to determine an appropriate corporate craving for risk and select an appropriate chief executive from all the member of the corporate governance team (Harford, Mansi and Maxwell 2012). The management has to set the plan and budget in corporate governance and later measure performance against it. The compensation of senior executive in audit committee has to be approved by the management.
The stakeholders of an organization become satisfied if they receive appropriate returns on their investments. The fair dealings of the financial resources by any company are represented by the truthfulness of the financial reports presented by the companies (Hermalin and Weisbach 2012). Hence, the auditors appointed by the companies are responsible to ensure that the company has utilized the liquid assets of the company wisely. Therefore based on the reports of the auditors and providing positive projection of revenue during the upcoming financial year so that the investors are able to invest in favor of the company effectively.
Auditors of Corporate governance are mainly concerned with the interest of stakeholder of the organization. They are mainly responsible for assuring that the company reveals a fair and transparent financial position. True and Fair concept has not been defined in the Companies Act, it only depends on the prudence of the auditors in auditing company’s financial position (Iliev et al. 2015). The mechanism of corporate governance is consists of two processes and these are internal audit and external audit. Internal auditors are appointed from among the members of the organization. External auditors are appointed by the board of directors.
Internal auditor has to ensure that the process and controls of the organization are as per the intended plan. They also have to determine which control process can be improved and can save money of the organization. Internal auditor also ensures resources of the organization are used efficiently (Khan, Muttakin and Siddiqui 2013). Often it is seen that many internal auditor of the organization want to show their position by minimizing its weakness. In such circumstances the financial statement would not give the true and fair picture of the organization. It will be unethical if the internal auditor does not provide transparent picture of the organization to their stakeholders (Rahim, Johari and Takril 2015). Therefore, the internal auditor has to properly detect the fraud of the organization. Fraud may lead to minion of dollars lose in corporation. The internal audit team must reveal the instances of fraud in the organization.
External auditors are the primary protector of corporate governance in any organization. External auditors are appointed in the organization for making the measures of corporate governance concrete. The primary role of external auditors is to protect the interest of the stakeholders of the organization (Larcker, Reiss and Xiao 2015). The external auditor can provide accurate interest of stakeholders if the report is conducted without the influence of the organization. The external auditor may recommend penalties to the officers who manipulate financial statement through inflating figures of financial statement. The regulators of the organization are more likely to believe if it is attested by the external auditors. It should be ensured that external auditors operate independently and there is no conflict in the interest of the auditors.
The primary responsibility of an auditor is to evaluate that the audit risks of the companies are eliminated and the company has shown effective control on the audit process without any interference on the audit process.
Corporate governance is the process of supervising the policies and procedures of the organization. The supervision helps in ensuring that the organization is running it business according to interest of their stakeholders (Li, Mangena and Pike 2012). The responsibilities of the corporate governance mostly lie with the directors of the organization. The internal auditors are responsible for ensuring that the process and procedures of the organization are in accordance with the intended plan. The internal auditors also ensure that the resources of the organization are used efficiently in achieving the goal of the organization (Maria 2012). The internal audit function is mostly year round process of the organization which is conducted by the employees. The audit manager is responsible for drafting an audit plan. This audit plan has to be unsigned by the board of directors. The internal auditors also have to show the instances of fraud in the organization.
The external auditors of corporate governance perform independently and reviews the all the report of the organization. These auditors evaluate all the payrolls, purchasing and accounting records of the organization. They also evaluate the documents like loan/ stock and investment. The intension of the external auditors would be to provide accurate and unbiased information about the financial condition of the organization (Ojo 2014). The external auditors may set up policies and measures for compelling accountability in the work environment. The external auditors may help to foster good relationship with the regulators. External auditors help in evaluating the organization for the compliance with the regulators (Michaely, Rubin and Vedrashko 2013). External auditors also ensure good crisis management that would be used in place of allegation of fraud.
Auditors of the companies are provided with an exact amount of fees in exchange of examining the financial reports of the companies and extract exact findings from the same and declare whether the financial statement is true and fair in the best views of the auditors (Ojo 2014). The audit fees paid by the companies are hence fixed and therefore decrease in audit fess might decline the quality of audit.
The fees of the auditors are set by the public organization of accounting department. Generally auditor general appoints auditors for the auditing purpose of the organization. The fees of the auditor are set depending on the extent and nature of the service to be provided by the auditors. The fees also set by the requirement of the auditing standards published by the ‘auditor general’. The auditor general appoints the auditor for the organization and auditor makes a draft audit fee where the auditor negotiates with the organization in setting their actual fees (Rahim, Johari and Takril 2015). Generally, UK provides high salary to their auditors so that allow a lower degree of managerial discretion while doing audit of the organization. On the other hand, the auditor should also be provided with exact amount of fees so that they do not misinterpret the financial information against the organization. The audit fees should be fair enough so that they give a transparent picture of the organization. The premium fee of the auditors led them to give premium quality of the financial report of the organization. Therefore, it can be said that the auditor should be provided with justified fees so that they provide transparent picture of the organization.
The auditors should definitely be carrying out the responsibilities independently and should always exercise effective control on the audit procedure (Rochmah Ika and Mohd Ghazali 2012). The companies must provide appropriate audit fees to the auditors and allow the auditors to continue the audit process efficiently.
The auditor should be provided with fair fees so that they appropriately uncover the financial position of the organization. The fees should be justified enough so that the auditors allow minimum managerial discretion in the auditing process and at the same time remain independent. It should be ensured that threes no conflicts in the interest of the auditor, because it can prevent the auditor in giving proper picture of company’s financial condition (Shleifer and Vishny 2011). On the other hand, providing unnecessary high fees to the auditors may lead to impaired audit quality. The organization may provide high fees to the auditor so that they hide the flaws of the organization. Therefore, the auditors should be provided with exact amount of fees and that should not be too high or too low. Large size of audit fees leads to higher risk in losing the independency of the auditors (Tricker 2015). The management can force the auditor in doing the audit in favor of the organization thorough proving an abnormally high level of fees. Therefore, the auditor should be provided with fair and justified fees so that a clear and transparent picture of the organization is made.
Appointment of experienced board members: The nominating committee of the organization should take adequate time in identifying the board members with appropriate skill and appropriate industry knowledge. There should be diversity in the qualification of the board member (Alworth and Arachi 2012). Some member should have proper industry knowledge, some members should be a helpful expertise and some other should offer new perspective.
Timely information: The senior management should provide timely information to the board so that better decision making is possible (Rochmah and Mohd 2012). However, board members should not be overwhelmed with unnecessary information. There should be a balance between the necessary information and irrelevant information.
Prioritize the risk: The board should prioritize the risk of the organization. Indentifying potential risk would ultimately increase the quality of decision making. Effective risk management in the organization lead to accurate cost benefits decision (Ariff and lau 2010).
Evaluate the performance of the board: The board should be willing to analyze their strength and weakness in a regular basis.
The study is based on the role of the auditing committee in maintaining the corporate governance. It is to be noted that the study reflects the necessity of analyzing each of the dependable variables related to the study and therefore, it is important to discuss the key issues related to the subject matter. The researcher has undertaken the secondary researches based on the collected information obtained from the books, journals, news papers, websites, and other secondary sources. The implication of the research study needs to be associated with the proper research study. The literature review contains the exploration of the concepts that are reflected in the hypothesis formations. The evaluation of the hypothetical values is effective enough in justifying the nature of the study and extracts the key analysis depending on the variables. Hence, the research study collaborates with the literature review process. Based on such information in the literature review part, the objectives would be linked to summarize the entire research study.
It is to be noted that the literature study includes the analysis of the proper variables related to the subject matter. The information gathered from the secondary sources is needed to be extracted from the authentic sources. It is true that the literature review includes the enriched information based on the subject matter. The researcher can easily get the idea of the information that can be utilized in the study. Hence, the enriched information is needed to be properly verified and authentic. However, the researcher is collecting the information from the websites, journal articles, books, and other secondary sources. There is no authentic source to verify the gathered data, which can be used for the research purposes. Therefore, it is to be ensured that the essentiality of the verified source is much significant and the researcher has to keep the concentration on the authentic evaluation of the study. Hence, it is to be noted that the literature review determines the gaps as there are no such authentic source.
On the other hand, it is to be noted that there are huge changes in the current scenario. Hence, the researches related to the same aspects would be changed accordingly. While gathering the information related to the subject matter, the researcher has to depend on the previous works presented by the earlier researchers. However, the researcher has to face the difficulties in searching the updated and current source to analyse the study. The researcher faced much difficulty in gathering the updated data. Hence, the gap is affecting the research study more specifically. The recognisable gaps in the literature are quite prominent in this particular study. The lack of the updated secondary sources and the proper verified information is the reason behind the incompleteness of the research.
The chapter includes the exploration of the concept related to the subject matter. The researcher has conducted the secondary research to collect the enriched information related to the same subject topic. The gathering of the data is mainly used for the betterment of the research process. It is to be noted that the exploration of the concepts of the key variables is associated with the study, which can be used further for the completion of the research. However, the researcher has faced several issues in gathering the verified information necessary for the secondary research study. The gaps have been identified in featuring the verified sources and conducting the research materials of updated secondary sources. The linking between the literature study and the current research has been analysed in this chapter. Based on such implications, the further study will be conducted accordingly.
In order to carry out the research more effectively, the researcher must conduct an effective study of the research methodology comprising of the research paradigms, research approaches, research techniques, collection of data and analyzing the same (Leedy and Ormrod 2012). The paradigms, approaches and designs selected for this study will be justified in order to ensure that the researcher has conducted the study in the best possible manner and ensure accurate result of the research.
While carrying out a particular research study, research philosophy normally supports the process of enhancement of knowledge that links and aligns on the methodology of this particular research. The researcher will adopt different adaptation policies in order to analyze the various methods or processes for selecting and utilizing the basic information for conducting the research study (Lancaster 2012). This particular research titled “Corporate Governance and the role of the auditors” is based on adaptation of various methods for carrying out the research. The different philosophies available for conducting the research study are:
Generally, two types of philosophies are used in order to carry out the research by taking the consideration of the ontology aspects (Kothari 2010) The philosophy of objectivism demonstrates interpretation of statement as the suitable statement when the statement is verified by taking consideration of the related facts of the particular topic. Subjectivism derives that the researcher proceeds with beliefs instead of relying on the facts of the subject.
Alike the ontology aspects, the aspect of epistemology highlights the presence of a couple of philosophies like positivism and Interpretivism. Discussion about the positivism philosophy, it is derived that the researcher applies the best scientific approach to conduct the research in a measurable as well as in an organized design of study (Hesse-Biber 2010). This particular aspect includes setting hypothesis, collection of data and analyzing the same and presents the true findings. Consequently, Interpretivism deals with collection of qualitative data and assessing the same by adjusting the data by constructing themes on the research subject. Positivism is selected in order to provide the aims and objectives of the study.
The researcher in this particular research is discussing about the role of auditors as well as the control of the management on corporate governance of the various companies and industries operating in United Kingdom (Handwerker 2010). Positivism has been selected as the main paradigm of this research as in order to stimulate the respondents of the research to engage in collection of primary data about the research. Positivism philosophy is appropriate for this particular research study, as database is required to find out how appropriate data about the role of the auditors is required to ensure the performance of the companies undertaking the responsibilities of corporate governance (Hakim 2012). The theory of positivism denotes support towards the research study for the purpose of collection of appropriate research data about the role of auditors towards effective corporate governance.
The researcher will make use of the deductive approach in order to proceed with the research in an effective manner. Generally, two types of research approaches are considered for conducting the research study, these are inductive and deductive research approach.
The inductive research approach is generally required to follow the collection of various data, observing the same and analyzing the various theoretical models (Hair and Money 2012). The deductive research approach is based on the different evaluation methods for supporting the database analysis of the organizations in UK.
The deductive research approach is based on the process of collection of numerical data and analyzing the collected data by determining the present trend of the audit functions and mechanisms controlled by the companies and conclude the hypotheses set during the initial stage of the research.
This particular research study, the researcher aims to evaluate the roles of the auditors in determining the level of corporate governance for the last three financial years (Gulati 2010). As this particular research analysis includes recent audit functions of the companies, it is suitable for the companies to use different recent data about audit and improvement of audit functions of the companies in UK.
The research design supports the research study in order to establish the various financial frameworks for the3 research. All researches are based on the design and pattern of objectives and the aims that has been set during the research (Dul and Hak 2012). The research is based on the companies of UK and different primary objectives are considered along with the research designs by supporting the priorities for describing the superiority of the research study.
Research that is entirely based on the selection of previous researches indicates the examples demonstrating the current standpoint of the research to concentrate on the important areas that provides better information.
The researcher will be dependent on the different journal articles and the previous research works conducted on this particular study, hence different articles will be reviewed on the topic called role of auditors and corporate governance of companies operating in UK (Denzin and Lincoln 2011). The selected research design is appropriate to highlight the study of auditor’s performance of the companies in UK and their level of corporate governance.
This particular research is based on secondary data collection method and therefore in order to proceed with the research in an effective manner, the researcher will gather relevant articles on the topic and carry out effective analysis of the discussions presented in these articles (Crowther and Lancaster 2012). Three different research articles are chosen in order to make critical review of the findings presented in these articles. The findings and the statements generated in these articles will be presented in the research to relate the links of this research and the previous researches taken for making comparison of the findings.
This particular research is based on the process of inclusion exclusion process or criteria for participation in the study. Inclusion criteria are the prospective subjects that should be included in the study and exclusion criteria means the factors that are not generally included in the research (Crouch and Pearce 2012). The different inclusion and exclusion criteria are stated as follows:
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Inclusion |
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Year of publishing |
The journal articles and the books that has been referred for this particular research is based on the journals and other articles that has been published during after 2011. Old journals were excluded from the research as process of audit changes frequently and new rules are implemented for the auditors during each financial year. |
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Language of the journal article |
The language of the journals and the articles are also considered behind choice of journal articles of the research. The journal with easy language that is simple to understand has been preferred for the benefit of the readers as well as for the researchers undertaking research work on the same topic in the future. |
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Content of the Article |
The content of the articles are also considered as another parameter of research work. The articles chosen should be selected that consist appropriate content about audit role, and level of corporate governance and role of management has been chosen. The search criteria of the journals are auditor roles, audit mechanisms, audit fees and corporate governance. |
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Time Factor |
The content chosen for this research has been limited to the trends for the last three financial years. The reason for choosing data for the last three financial years is to obtain the recent trends in the role of the auditors and the level of corporate governance. |
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Recent trends |
The recent trends of the auditors and majority of the companies in UK highlight better corporate governance of the firms and their increasing role of corporate social responsibilities. In general, the companies also try to present financial statement in a true and fair manner to retain the participation of stakeholders. |
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Journal selection criteria |
In order to conduct the research, primarily ten thousand journals and articles were chosen, but while proceeding with the research, total 100 best articles were short-listed and used in the research. |
The collected journals, articles, books and online articles used in the research has been will be evaluated in this particular research. The similar topics gathered from the 100 selected journals based on the title “Role of auditors in Corporate Governance” would be analyzed and find out the level of cooperation that the companies exerts on the auditors to ensure better level of auditing roles (Corbetta 2011). The fees paid to the auditors in exchange of the services are also considered for this research and are related how the performance of the auditors might change in accordance to the fees paid for carrying out the auditing responsibilities.
The research being based on secondary research and needs to maintain authentic and related data for continuing the process of the research, different articles, books and online materials had to be accessed for finding the needful information on the topic. For this research several articles have been found that relates to the topic and connects well with the present research. Some of the articles had relevant information and content but were too old to consider for the research (Cooper and Schindler 2010). Even the data used for this research is entirely dependent on the findings presented by the past researchers and lack of accessibility of real and authentic data of the companies in UK might hamper the reality and validity of the data used for this research. Therefore, the research is entirely dependent on the findings that have been extracted from 100 journals that have been reduced from 10,000 articles.
While conducting any research, it is essential to consider values and ethics of the collected data and the researcher has not violated, manipulated, or altered any particular data for deriving any sort of biased results for this study. Even any unrelated data has not been used in this particular researcher to provide any favorable result for any particular company or the companies operating in UK.
The researcher has tried to keep the data as authentic as possible to derive the best possible result of the research. No irrelevant data or old data for more than four years have been used in this research to maintain the authenticity and validity of the research.
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Research activities |
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6th to 9th week |
10th to 18th week |
19th to 22nd week |
24th week |
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Topic selection |
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Literature review |
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Research methodology |
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Secondary data collection |
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Data analysis |
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Research findings |
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Conclusion and final submission |
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The entire research methodology containing research physiology, research approaches, research designs, inclusion – exclusion technique and consideration of accessibility and ethical issues faced by the researcher while conducting the research has been highlighted. The data collected for the research has been tried to keep reliable and authentic and has been tried to include data for the last three financial years. The time schedule presents the step – by – step process that has been undertaken by the researcher to complete the research in due of the 24 weeks that has been utilized by the researcher to complete the entire process of the research.
In this modernised world, the contribution of the corporate governance is very much significant. The world with the financial crisis can be much facilitated by the structured process of corporate governance (Frank and Goyal 2011). On the other hand, the audit committee is playing the most vital role in prior to organisations’ control, accountability, and directions. The study is providing the idea of the role of audit committee in corporate governance. The researcher has selected the secondary research purposes for this particular subject matter. Therefore, the chapter includes the analysis process of collected secondary information. The chapter contains the thematic analysis of the subject matters in keeping the concentration on the variables. The collected information from the websites, journals, books, articles, and other secondary sources would be associated with the thematic analysis of the subject matter. Based on the analysis of the collected information, the further research will be evaluated.
The role of the audit committee is very much significant in concerning the corporate governance. It is to be indicated that the role of the audit committee depends on several codes underpinned the process of corporate governance (DeAngelo and Masulis 2010. Therefore, it is important to discuss the corporate governance codes and the discussion is as follows:
As per the first section in the corporate governance codes, it was notified that the participations of the effective board are essential in determining the long-term success of the company (Castanias 2011). Therefore, the executives need to have a clear vision in maintaining their responsibilities and establishing the effective leadership skills.
In maintaining the skilful attributes of the company, it is necessary to keep the focus on the board and the effectiveness of the committee. The effectiveness is thus dealing with the enhancements of the balanced skills, independence, and experience that enable the respective responsibilities (Brunnermeier 2012). In fact, the maintenance of the effectiveness is associated with the maintenance of the responsibilities of directors, supervisors, employees, and management.
In determining the position and prospects of the company, it is necessary for the board to present the balanced, fair, and understandable assessments. The recognition of the nature and principles of the potential risks is depending on the board’s responsibilities (Brennan and Subrahmanyam 2012). Therefore, it is important to evaluate the transparent arrangements to consider the probability of controlling the corporate principles and risk management.
The remuneration of the executive directors is needed to be designed to promote the establishment of the company’s long-term success. Therefore, it is needed to be followed a transparent process to develop the required organisational policies. The fixation of the remuneration process is also essential in such manner.
The board has to take the responsibility to maintain the skilful relationship with the shareholders (Brealey and Myers 2010). Hence, it is important to consider the arrangements of the meetings with the shareholders for the communicational transparency and the development of the business.
In concentrating on the codes proclaimed in the concept of corporate governance, the audit committee needs to include the participation of minimum three independent non-executive directors. The chairman of a smaller company is considered as the additional member of the committee. However, the member will be ensuring the position of the chairman by depending on the independent working skills. Moreover, as per the code specification, it is noted that at least one member of the committee needs to have the recent and required in the financial zone. However, the code does not specify the justification of the ‘relevant experience’. On the other hand, it can be inferred that the ‘relevant experience’ refers to the professional qualifications derived from the field of accountancy (Benito and Whitley 2010). One of the main disclosures of the company’s financial report is the failure to understand and satisfy the requirements. In most of the cases, it has been seen that the experts are the retired financial directors from other companies. In fact, the former partner of an accountancy firm can take the participation in the committee. In order to comply with the recommendations associated in the code specifications, the board needs to eliminate the participations of the own auditors or former finance directors of the company. The justification would be highlighted in the annual report of the company.
It is notified that in most of the cases, the committee face the issues, which is essentially be tackled by providing the employees proper induction and the training process. As per the main principle, it is stated, “The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors”. Therefore, the specifications of the committees; responsibilities are provided further:
The initial duty of the committee is to monitor the level of integration in company’s financial statement. The committee needs to review the financial controls and related risk management assessment. The committee needs to keep the focus on reviewing and monitoring the functions of internal audit (Berger and Udell 2011). The recommendations are needed to be based on the appointment or replacements of the external auditors. The review is needed to be associated with the effectiveness of the working skills. The committee needs to develop and implement the policy while considering the use of the auditors and non-auditor services.
In considering the financial integrity for the shareholders of a company; the contribution of the audit committee is commendable. The member of the audit committee needs to be aware of the oversight responsibilities. The specifications are based on the ways to carry the responsibilities. The addressed failures can affect the process maintained by the audit committee (Bevan and Danbolt 2010). The risk management includes the recognition of the potential risks, which may affect the achievement of the organisational objectives. Therefore, the audit committee team needs to analyse the risks, eliminate several risks, and manage the remaining risks for the future prospects of the company. However, it is to be noted that the board of directors are the main responsible people who are dealing with the risk management. Hence, they have to identify, assess, manage, and monitor the risks, which are associated with several organisational processes. The risk management is depending on operating, developing, and monitoring the internal controlling assessment that needs the justified assurance.
There are mainly three types of the mechanisms underpinned in the process of corporate governance. These mechanisms are discussed further:
The sets of the controlling the organisational corporate governance is mainly obtained from the internal mechanisms. The measurement of such controls is thus associated with the monitoring and progressive activities of the organisation. These activities need to facilitate the corrective actions during the critical situations of the business. The internal mechanism deals with the corporation’s larger internal control fabric, which are referring the participations of the both internal and external stakeholders. The underpinned objectives are concentrating on the smooth operations and the clarifications of the defined reports regarding the performance skills. Blundell-Wignall (2011) stated that the internal mechanism in the corporate governance includes the oversight of management, which is signifying the independent internal audits. The board directors even have to ensure their levels of the responsibilities, policy development, and segregation of the controlling system.
The external mechanisms are supposed to be controlled by the outside an organisation. The objectives of an organisation are served by the governments, regulators, financial institutions, and the trade unions. It is to be noted that these specified objectives are associated with the legal compliance and the adequate debt management. The external stakeholders are sometimes imposing on the organisations as per the forms of union contracts or the guidelines of the regulatory bodies. The external organisations are sometimes maintaining the rules and the guidelines, which initiate the best practices for the achievements of the organisational objectives (Booth, Aivazian and Maksimovic 2012). It is to be noted that the organisations can even ignore the guidelines if these are not convenient for achieving the success. The company can even report the governance mechanisms to the external stakeholders of the company.
The independent external audit is referring the financial statements based on the structure of the corporate governance. In fact, an audit of the financial statement of the company is sometimes serving both the external and the internal stakeholders simultaneously. The financial statement, which has been audited are accompanied by the auditor’s report. This particular report is helping the employees, investors, regulators, and the shareholders to determine the corporation’s financial performance. The practices are useful enough in providing the broad but limited overview of the mechanisms underpinned the internal business scenario. The practices are even providing the realistic approaches for the future prospects.
It is to be noted that the small businesses are utilizing the principles of the corporate governance in a relevant manner. Therefore, it has the commendable significance in the world of business. The small business sometimes is not implementing the internal mechanisms on a noticeable scale. However, the functions are sometimes applied to the small businesses in a very prominent manner. The business owners are sometimes taking the strategic decisions based on the responsibilities maintained by the workers. They are in fact monitoring the performance as per the convenience of the mechanism controlling aspects (Bevan and Danbolt 2010). Therefore, it can be stated that the role of the audit committee is necessarily needed to be implemented in performing the mechanisms related to the corporate governance.
The importance of the auditor independence is much significant since it has the impact on the quality parameter of the audits. The definition of the audit quality is discussed below:
It is to be indicated that the audit quality can be impaired if the auditor will remain independent. In discussing the auditing profession, the maintenance of the independence of the auditor is considered as the very critical issue. Therefore, there is the clear linking between the audit quality and auditor independence. It is to be noted that the contingent audit fees are associated with the multi-period commitment, which proves the value of the incumbency. There is the possibility of negative effects if the reporting policy is disagreed. The report initiating the disagreement is covered by including more than one reporting period. In focusing on the positive effects, it can be interpreted that the value of incumbency is mainly dealing with the client-initiated changes by eliminating the compromises of independence (Bevan and Danbolt 2010). However, the evidence-based reports that evaluate the effects of the client’s importance are mixed with the behavioural approaches.
Many of the researchers try to establish the linking between the audit and non-audit fees. The linking between these two types of fees refers to the pricing effects regarding the externality of the knowledge between the proposed services. The evidence underpinned in such association is providing the mixed ideas. Therefore, it can be inferred that the audit fees has the significant impact on the audit quality. Bevan and Danbolt (2010) mentioned in the previous research study that the auditor independence is one of the driving forces in determining the establishment of the audit quality. On the contrary, the audit fees are mainly established for evaluating the concept of the performance related to the service pursuant. The mixed efforts of the audit fees and audit dependence are ensuring the outcome of the proper audit quality.
The disclosures related to the articulated financial statements are defining the magnitude that is concerning the non-audit fees. This type of non-audit fees is needed to be paid annually to the external auditors of the firm. It is to be noted that the audit fees is concentrating on the entire fees that are not charged directly and including the implementation of the system. The amendments on the systems, preparations of the taxes, fees of the consultants, and the audit fees of the internal auditors are considered as the most relevant and specified areas in such cases. In some of the countries, the non-audit fees are creating the special impacts in the auditor independence.
Corporate governance is relatively a new term and was introduced from the year 1970s when corporate culture was emerging in the United States (Bevan and Danbolt 2010). Most of the companies were busy with the merger and acquisition when the need of the governance emerged in the business sector. Corporate governance is the operating backbone of the organization that provide several directions and path in which organizations run. Most of the time corporate governance is conducted by the order of the director whereas the role of the director is set by the governance committee of the organization. According to Shleifer and Vishny (1997), “corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment”. Therefore, the governance committee are the association of the major stakeholders within the organization who are taking the responsibility to provide required support to the operational activity of the organization to ensure maximum level of profit in the business process. Corporate governance also provides the support to financial planning of the organization because utilization of the resources is one of the main aspects that ensure the success of the organization (Cassell et al. 2012). Most of the studies on corporate governance have light their views on the role of the executive members of the organization versus the non executive members of the organization that are dependent on the independent role of board of directors, independence of audit committee, independence of enforcement and compliance and independence of internal audit. All these factors of the corporate governance are important for the proper accountability, efficiency, integrity and transparency. It is easier to say that corporate governance covers all aspects of the organization so that monitoring process is implemented properly within the organization. Therefore to provide transparency in the organization it is very important to provide proper collaboration of every department (Tricker 2015). If the organization is conducting the corporate governance then it is very important that the corporate governance provide proper independency to the auditor of the organization. Both external and internal auditors are important for the transparency in the operational process of the organization therefore it is really important that corporate governance of the organization allows auditors independence. There are both effects that are visa versa associated with the independence of the auditors and approach of the auditors. Independence of the internal auditors will ensure that the internal operation of the organization is running in the right way and decisions are made properly. If the external auditors are getting the independence then they will help to rectify the places of the accounting process so that the organization is able to provide the right report to the board and the shareholders. Compiling all the reports from the independent auditor’s governance committee will evaluate the direction of the organization (Gao and Kling 2012). Therefore it is important within the organization that all the governing committee can work in their independent way with the right kind of approach that does not exceed the code of ethics.
The chapter includes the analysis of the gathered secondary information related to the subject matter. The researcher has gathered the relevant information based on the same subject topic and divided the variables as per the convenience of the study. Hence, it is important to understand the value of the study in keeping the concentration on the thematic analysis. The presentation of the themes have been analyzed as per the requirements and therefore, the researcher identifies the concept more significantly. In keeping the focus on this analysis part, the research objectives would be linked in the next chapter. Depending on such analysis the suitable recommendations would be provided.
This particular section of the research will derive the conclusion that has been derived from the entire study. Various recommendations will be provided to the companies of UK regarding the issues that has been identified from the context of the companies that are presently operating in UK. The objectives will be linked with the literature of the research to derive the functionalities and the motive of undertaking the research on the topic titled “Role of auditors in Corporate Governance”. The limitations of the research will be determined in order to find out the gaps or the limitations that has been found for this particular research. Scope of the particular study will be derived to find out the scope of the research in future.
This particular section of the research will highlight the objectives that will be linked with the literature and the findings derived from the research analysis and the findings. The objectives of the research are:
After linking with the first objective of the research, it is evaluated that the auditors appointed by the companies should be responsible enough to ensure better exercise of corporate governance of the companies that are operating in UK. The audit committee appointed by the companies should be responsible enough to ensure that the auditing processes of the companies are carried out in true and fair manner. Generally, the auditing procedure of the companies are carried out in two way process such as internal auditing and external auditing.
The internal auditors or the accountants of the companies are the staffs of the companies and therefore they might carry out auditing process in biased form and might not exercise proper control on the audit risks of the company. The external auditors are responsible to ensure that the internal auditors of the company have not carried out the auditing procedure in any sort of unfair and unethical manner. The external auditors must eventually detect the risks of audit to ensure that the management has exercised effective control on the internal auditors of the company to ensure that the financial recordings have been done as per the truest knowledge and has not supported any sort of mismanagement of cash and financial recordings. The audit committee should evaluate and examine the exact process of auditing to ensure minimum mistake of the auditors and ensure the stakeholders of the company regarding better utilization of the resources of the company and ensure positive return on the invested capital on the company.
Linking the second objective of the research it can be stated that the audit committee appointed by the company should take care of the entire process of auditing starting from the process of undertaking better care of financial recordings. The audit committee should ensure that the management of the organization should not interfere the process of undertaking the audit works. The management of the organization must ensure that the auditors are able to work accordingly and most importantly in independent manner so that the company or any other employees of the organization are able to misuse the assets or financial resources of the company in any unethical manner. Hence, the mechanism of the companies should be well aligned to ensure that the companies are able to utilize the financial resources of the investors wisely to avoid any sort of confusion regarding mismanagement of liquid resources.
Linking the third objective of the research, audit fees play an important role in auditing. Generally, the fees of the auditors are fixed by the auditing board of the country and the companies are supposes to pay the fees to the auditors in exchange of their consultation towards the companies. The companies sometimes make bargain in the fees of audit, hence the auditors might not carry out the research work in an appropriate manner, and therefore the audit report of the companies must not be appropriate for the company. In many case the companies try to exert pressure on the auditors to carry out the audit functions in exchange of higher fees to make sure that the auditors neglect the responsibilities of the organization regarding appropriate financial recordings of the organization.
The research on this particular topic has some limitations that have been faced by the researcher while conducting this particular research. Primarily, the researcher did not have adequate time to gather all types of relevant data based on the UK companies on audit work and the mechanisms that has been followed by the companies. Similarly, the researcher has been unable to gather appropriate and true data of the companies due to lack of access to the original audit reports and financial statements of the companies operating in UK. The budget constraints has been another major hindrance for the auditor as the researcher could not afford to purchase books or journals that highlights these topics, hence had to rely on the free articles available in the internet.
This particular researcher definitely fails to identify the different parameters of auditing like exact mechanisms that the auditors undertake to conduct the audit reports of the companies. The researcher also fails to highlight the procedure of the detection of risks of audit that the companies fail to exert. The research also fails to identify the various process of examining the financial statements of the companies and the process how the auditors could ensure better control on the audit process of the companies. Similarly, the lack of use of real data of the companies failed to provide real and authentic data of the companies to make sure that the companies have been using appropriate mechanism of audit control and find out the possible risks that are prevalent in the company accounts.
The entire study highlights that there are still different scopes and possibilities to ensure better quality of audit. Therefore, the recommendations that could be provided are that the companies should ensure the internal auditors are entitled to ensure better audit mechanism. Moreover, the companies should always ensure that the employees maintaining the financial resources should ensure that proper recordings are maintained and exercise better control on audit.
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