Corporate auditing is broken. Here’s how to fix it – CapX

Can any auditor be truly independent if it is selected by the management it is supposed to review without conflicts?

The corporation’s shareholders – key users of the audit report – nominally have the authority to choose auditors. But this authority is usually exercised upon the recommendation of the corporation’s board of directors, which customarily defers to senior management. Not doing so can be construed as a vote of no-confidence.

This practice has to change. While most managers are not actively conspiring to mislead shareholders, the purpose of the audit is to mitigate such possibility. The role of auditor is that of invigilator, and “getting along” with management is not an essential requirement: indeed, it may well be a hindrance to sustaining auditors’ professional scepticism of management practices.The solution: amend the boardroom handbook to require that the decision to appoint auditors be made entirely independently of senior management. Managers should learn of the choice of auditor when this decision is first made public by the independent, non-executive members of the board.

Source: Corporate auditing is broken. Here’s how to fix it – CapX

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