Auditing, Reporting and Disclosure

Sergio Scandizzo

We have seen in previous chapters that external auditors have to balance the need to understand the client’s business and risks with the danger of failing to verify and be sceptical about management’s explanations. This challenge can be aptly described as a trade-off between objectivity and proximity (Boot and Macey, 2004). The problem is compounded by the fact that auditors are required to monitor the same entities that hire and compensate them. Considerable attention has been given to identifying the key features of the audit appointment process that could ensure and maintain the appropriate level of independence. These include the responsibility for making the final selection, the practice of rotation of either audit firm or audit partner, or both, and to what extent auditors should be allowed to perform consulting work for the auditee.

There is broad consensus on auditors being selected by an audit committee, with the latter staffed mainly by independent directors. As observed in case of the compensation committee, the systematic representation of all stakeholders on the board of directors should go a long way towards enhancing independence and improving transparency of