Role of auditors in the management of successful firms

Of late there have been lots of governance scandals globally. Many causes of corporate governance scandals have been attributed to boards of directors failing in their fiduciary role to shareholders.

A board of directors is charged with managing the company while shareholders own the firm. The directors have the expertise in managing the company and are in charge of day to day activities. They therefore have a lot of information which shareholders may not necessarily have.

The board may mismanage the company leading to loss of share value.

Kenya has had its fair share of corporate scandals where a number of firms that were considered success stories suddenly went down as a result of bad governance.

Some directors take advantage of the asymmetry of information between them and shareholders to conceal information and cook books of accounts to misrepresent performance.

Some misrepresent performance as they are under pressure to perform.

They therefore cook the books of account to over inflate profits so as to have a reflection of good performance when in actual fact this is not the case.

Other directors misappropriate funds by diverting income into non-existent ventures. In today’s article, I want to highlight the role of auditors in good governance.

In some countries, auditors are appointed by shareholders while in others they are appointed by directors.

Some boards have audit committees which oversee the appointment and remuneration of auditors.

In Kenya, the Companies Act 2015 gives both directors and shareholders power to appoint auditors.

In my view, unless there is serious cause for concern, the audit committee of the board should appoint and oversee auditors.

This is because directors have the expertise to oversee auditors and hold them accountable for their reporting.
In some other countries, the audit committee should comprise of independent directors.

An independent director is one who has no direct interest in the affairs of the company and is usually appointed due to their neutrality.

Such directors fit well in the audit committee and this has been the international best practise. Board members, however, can also oversee auditors. For example they can block the re-appointment of a particular auditor and remove auditors by resolution.

Auditors are important for good governance as they certify that the books of account are true.
They have a big role to play on the financial affairs of a company. In performing their role, they have a number of rights, the top-most being the right to information.
An auditor can call for any information from a company’s officials to enable him file an audit report.

It is a criminal offence to give false information to an auditor.

This therefore means that directors who cook books of account to inflate their performance can be prosecuted under this provision if they give false information to an auditor.

Auditors who give false financial information in their reports also commit a criminal offence which is punishable by fines and a jail term.