Just as forensic science has been helping catch the criminals for long, forensic accounting is fast emerging in the arena of corporate accounting frauds to play a similar role.
The
role of auditors and audit committees has become muddled
around the world. Experts that include law and accounting
professors are misleading legislators, governments and
the public on the role of the external auditor and audit
committees.
This
confusion arises because the legal basis for the regulatory
audit by an "independent accountant" in the
US is quite different from the legal role of a statutory
auditor in the UK. In the US, audited accounts purport
to inform secondary markets on the economic value of
a company for the purpose of buying and selling shares.
In
the UK, Lord Justice Oliver stated in the Caparo decision
of 1990 that the role of the statutory auditor is "first,
to protect the company itself from the consequences
of undetected errors or, possibly, wrongdoing (by, for
instance, declaring dividends out of capital)".
"Second, to provide shareholders with reliable
intelligence for the purpose of enabling them to scrutinize
the conduct of the company's affairs and to exercise
their collective powers to reward, control or remove
those to whom that conduct has been confided".
No reference is made to valuing shares because UK law
also applies to non-profit companies that do not issue
shares.
The
legal basis for US financial reporting and auditing
creates conflicts of interest between the auditor and
the directors. It also creates a conflict between external
directors on an audit committee when they review the
integrity of the accounts produced under the authority
of the executive directors. The appointment of independent
directors can reduce the conflicts of interest but perhaps
not the conflicts of loyalty between directors. But
independent directors cannot eliminate the conflict
of interests that can arise between directors and the
shareholders, or with the corporation. |
