How Audit Practices Got Muddled in the US and UK

Abstract

This paper considers how auditing practices became muddled in the US and the UK to create muddled corporate governance principles. The US 1933 law that required corporations to appoint an auditor was based on the prospectus provisions in the UK 1929 Companies Act to protect investors from fraud. However, this is not the purpose of UK statutory audits whose legal role is to protect the company and provide shareholders with intelligence for voting on the election and remuneration of directors whether or not the company issues shares or whether it has shares publicly traded. The UK statutory auditor only reports to the shareholders who approve his appointment and remuneration. The US auditor is appointed by the directors and reports to both directors and shareholders to subrogate the reason for having an auditor to identify conflicts between them. The establishment of audit committees with independent directors cannot remove the conflicts. These are exacerbated by the Sarbanes-Oxley Act and the UK Combined Code that require audit committees to provide oversight of the auditor. Some European countries avoid these conflicts by the auditor being controlled by a shareholder committee or “watchdog board”. Audit practices got muddled by corporations not establishing a shareholder audit committee as provided in the model constitution attached to the UK 1862 companies Act. Compelling arguments are presented to conclude that convergence of audit practices on those found in the US or UK is not in the best interest of directors or auditors in reducing their conflicts or safeguarding: investors, the proprietary rights of shareholders or self-governance.