By Dr Steven Firer
For decades, the auditing profession has been troubled with high levels of litigation and accusations. The traditional argument is that the criticism of, and litigation against, auditors is due to the failure of auditors to meet society’s expectations.
It is essential to recognise that the legitimacy of the duties and standards adopted by auditors can never be isolated from the expectations of the various interest groups within society, who all rely upon the auditor’s services. This umbilical-cord relationship between the auditing profession and the various interest groups within society forms the basis for the increased scale and frequency of litigation against auditors. Auditors and society have entered into a social contract. It is not written, but is implied. The social contract (or as it is sometimes called, the community licence to operate) incorporates community norms and expectations about how an organisation should conduct its operations (including what information it produces).
A well-functioning economy relies on sound financial statements. Accounting by companies serves not only management but also the wider public interest, including financial stability. Statutory auditors play a pivotal role in this respect, as they are gatekeepers for the benefit of users of such financial statements. The quality of the auditors’ work should allow users to build trust and to decide whether to invest or to divest in companies. If users cannot trust financial statements, companies will no longer have access to the capital they need.
Shareholders and society have limited access to information about the operations of a company and may believe, therefore, that they are not getting the right information they need to make informed decisions, or that the information being provided by way of the financial statements is biased. As such, shareholders and society may lack trust in the directors and, in such a situation, the benefits of an audit in maintaining confidence and reinforcing trust are likely to be perceived as outweighing the costs.
Read more on Accounting Weekly.