aim to ensure directors manage the company in the best interest of the owners and other stakeholders

Audit profession failures during the past decade have been spectacular: Enron, WorldCom, Global Crossing, Health South, and now the financial crisis. • Congress reacted to these failures by enacting Securities Exchange Act of 1933. • The Sarbanes–Oxley Act of 2002 fundamentally changed the auditor– client relationship.

Globally – Organization for Economic Co–operation and Development (OECD)

Nationally – individual countries develop their own

Companies – Many companies develop their own policies on corporate governance

Accountability • Transparency • Integrity • Focus • Independence and objectivity

Significant provisions include

should ideally: • For public companies, the audit committee must be composed of outside directors, i.e., directors who are not members of management and do not have other relationships with the firm (e.g., as vendor, consultant, or general counsel) • The audit committee should include at least one financial expert who has an understanding of GAAP and has relevant accounting and audit experience • The committee should have clear written terms of reference setting out its authority and its duties.

key objectives – To increase public confidence in the credibility and objectivity of published financial information. – To assist the directors in carrying out their responsibilities for financial reporting. – To strengthen the position of the external auditors by providing a channel of communication at board level without the constraint of any executive bias

primary responsibilities – Provide oversight of the accounting and financial reporting processes and of the financial statement audits – Appoint, compensate, and oversee the external auditor, including approving any non–audit services to be provided by the external auditor – Ensure that the board establishes a whistleblower program – The authority to hire and fire the head of the internal audit function – Set the budget for the internal audit activity, and review the internal audit plan and discuss all significant internal audit results – Performing or supervising special investigations, reviewing policies on sensitive payments, maintaining communication between the board, management, the external auditors, and the internal auditors, and coordinating periodic reviews of compliance with company policies such as corporate governance policies

audit committee expects the external auditor to report to the audit committee: – All critical accounting policies and practices used by management – All material alternative GAAP treatments that have been discussed with management – Other material written communications between the auditor and management

advantages • It can improve the quality of management accounting as they are able to criticize internal reporting, which is not necessarily the responsibility of the external auditors. • It can facilitate communication between the directors, internal and external auditors and management. • It can help minimize any conflicts between management and the auditors. • It can facilitate the independence of the internal audit role if the internal auditors report to the Audit Committee directly.

disadvantages: • It can be perceived that their purpose is to criticize or ‘catch out’ executive management. • This can result in the perception, if not the reality, of a two–tier board. • The non–executives can become too embroiled in detail and start to act like executive directors thus losing their independence.

Good governance is important to the conduct of an audit for one very simple reason: companies with good corporate governance are less risky to audit

companies generally have the following characteristics: – Are less likely to engage in “financial engineering” – Have a code of conduct that is reinforced by actions of top management – Have independent board members who take their jobs seriously and have sufficient time and resources to perform their work – Take the requirements of good internal control over financial reporting seriously – Make a commitment to financial competencies needed

Many audit firms are not willing to accept potential audit clients unless the clients demonstrate a strong commitment to good corporate governance.(a public company that does not commit to goodcorporate governance is too much of a risk for an audit firm.)

Most audit firms look at the governance issues when making a decision to become associated with, or to remain associated with, an audit client