Why Emerging Economies Should Not Follow US and UK Audit Practices

Abstract

This paper provides evidence why Emerging Economies should not follow US and UK audit practices that have introduced untenable conflicts of interests and muddled corporate governance practices. 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 being misinformed about the future value of a company. However, this is not the legal purpose of a UK statutory audit whose role is to make directors accountable in protecting the company and provide shareholders/members 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 her/his appointment. The US auditor is appointed by the directors and reports to both the directors and shareholders to subrogate the reason for having an auditor to identify any conflicting views between them. The establishment of an Audit Committee with independent directors cannot remove the conflicts. Their introduction from the Sarbanes-Oxley Act and the UK Combined Code introduces additional conflicts between executive and non-executive directors. Some European countries avoid both conflicts by the auditor being controlled by a shareholder committee. 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.