Need for Auditors, Certifiers, and Consultants to be Ethical and Manage Conflicts of Interest

How Corporates and Auditors, Certifiers, and Consultants Partner with Each Other

In the corporate world, companies have relationships with a number of external and third party entities like suppliers, auditors, certifiers, and consultants who either advise them on their strategies, partner with them in the supply chain, audit their financial statements, and have a network of relationships covering many areas.

If we take the case of auditors, certifiers, and consultants and their relationships with corporates as the topic for this article, we find that in many cases, the corporates engage with these entities as part of transacting business for the everyday existence.

For instance, company law specifies that the annual and quarterly financial statements be audited and that the quality processes and the standards that the company follows as part of its operations be certified by independent agencies.

Apart from this, consultants are usually engaged by the companies to put out guidance statements as well as advise the financial community on how well or badly the company is doing.

In other words, the corporates have working relationships with all these entities that form part of the independent agencies tasked with overseeing the affairs of the companies and interacting with them as an interface to the stakeholders and the investor community.

Real World Examples of Collusion

In this respect, there is a need for auditors, certifiers, and consultants to be ethical in their dealings with corporates. As was seen in the way the American Energy behemoth Enron collapsed as it was found to be fudging its accounts and indulging in corrupt practices, the main reason that was found was that the auditors and consultants, Arthur Anderson, were in glove with the Enron top management in hoodwinking the regulators and the investor community.

Importance of Ethics

Further, the cases of WorldCom, Lehmann Brothers, and Satyam computers in India were examples of corporates that colluded with their auditors, certifiers, and consultants in an attempt to indulge in fraud and get away with it. These examples show us that extreme caution and care have to be exercised by these entities when they deal with the corporates and they must preserve their integrity and independence at all costs.

The point here is that these entities are professionally and by law tasked with the responsibility of protecting stakeholder interests and hence, they must not compromise and betray the faith and trust that is placed on them. There are other examples in this category as well and as most of these cases are still being investigated, it would not be prudent to name them all.

It would suffice to state here that there is a fine balance between providing professional advice and auditing the statements in a fair and equitable manner and crossing the line to be conspiring with the corrupt and rotten bad apples in the corporate world.

Changes in the Company Law and Need for Self Regulation

It is not that stakeholders and investors are not aware of these tangled relationships wherein corporates and the independent entities are often partners in crime. This is the reason that recent changes to the company laws have made it mandatory for the corporates to change auditors every few years depending on the logistics and practicalities involved.

Further, the company law has been amended to ensure that consultants and auditors are not from the same company as the Enron case proved that when consultants and auditors are from the same firm (which was Arthur Anderson in Enron’s case), the chances for the fraud becoming bigger multiply. Of course, it is understood that the best practices in corporate governance would entail that these changes and more importantly, oversight from regulators be the guiding principles for the corporates and the independent entities that provide services to them.

Finally, as has been emphasized by many experts, ethical norms must come from within and any number of laws cannot substitute for ethical conduct by the corporates and these entities.

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Corporate Governance