ROLE OF EXTERNAL AUDITORS IN CORPORATE GOVERNANCE AND FINANCIAL REPORTING: CAPITAL AND LIQUIDITY REQUIREMENTS, AND THE FINANCE THEORY

This book is aimed at specifically directing the need for greater focus on regulations, compliance and enforcement processes in the financial system. Many instruments require complements – as this book will also illustrate. The essential role of external auditors in financial regulation has already been discussed extensively in many publications. This book is aimed at illustrating that certain capacities exist whereby the dual role of the external auditor (in undertaking internal audit roles as well as skilled persons roles) could be exercised to the optimal and maximum benefit of an entity or organisation. It also aims to accentuate on why a return to and focus on traditional auditing techniques, as well as auditing techniques which focus on internal controls is a much needed move. In so doing, it contributes to the extant literature by highlighting why such a move should be facilitated, as well as proposing means whereby such a move would be facilitated - namely, through a focus on benefits which could be derived where the external auditor is able to incorporate certain internal audit responsibilities. Attention is also drawn to safeguards which require due consideration if the ever important attributes of objectivity and independence, in auditing, are not to be compromised. Whilst the benefits and potentials of the dual roles assumed by external auditors are emphasized, as well as the need to ensure that safeguards operating to guard against a compromise of objectivity and independence are in place, a support of dual roles should also take into consideration the utmost priority of ethical values. The book, hence, also highlights the fact that such dual roles are appropriate in certain cases – as illustrated by justifications for limitations imposed by the Sarbanes Oxley Act and other relevant and applicable legislation – even though instances also persist where section 201 of Sarbanes-Oxley, with regard to internal audit outsourcing, may have been over-reactionary and may continue to hinder both companies and their auditors.

Further, the roles assumed by capital regulations, with liquidity and leverage ratios as complements, will be highlighted in various chapters of this book – these being essential complements to a risk based capital framework implemented by the Basel Committee on Banking Supervision.

Concentrated ownership structures have frequently being cited as means of addressing agency problems so the above remarks may appear surprising. However, evidence also exists to bolster the claim that insider dealings are better facilitated in environments involving concentrated ownership structures. Furthermore, external corporate control mechanisms appear to function better and more frequently in Anglo American dispersed ownership systems. The most recent Financial Crisis has illustrated that since the Efficient Markets Hypothesis cannot be relied upon, regulation is a necessary complement to effective monitoring. Complementary to such effective monitoring is also the need for the involvement of external auditors in the regulatory process – since there exists every likelihood for regulatory capture to occur.


If perfect markets and perfect competition existed, and if there had been a world without externalities, perhaps markets would have been able to regulate themselves effectively and there would have been no need for regulation or external auditors.