External Audit Process Failures: Unethical Practices and Business Demise

Abstract

The primary aim of external auditing is for the independent auditor to comply with authoritative ethical standards in checking and verifying the authenticity of already recorded transactions and thereafter expressing an opinion as to whether the published financial statements and reports were made in all material aspects in accordance with ethical and relevant accounting and financial reporting standards and regulations. By reporting and expressing an opinion the independent auditor helps to establish public confidence and credibility over the financial statements and reports, even though such must not be interpreted as assurance regarding the future sustainability of the enterprise or with regard to the economy, efficiency, or effectiveness of management. The external audit specifically relates to the independent examination of the financial statements of an enterprise by an external auditor appointed by the shareholders. Even though the external auditor may perform the same audit procedures as in the case of the internal auditor, unlike the internal auditor, the external auditor does not report to the board and management but to the shareholders. The external audit is, therefore, important for strengthening transparency and accountability to key external stakeholders in the management of all organizations. External audit as a recognized watchdog mechanism is expected to have probing eyes on the financial statements and reports of the company as a measure of promoting corporate governance and enterprise sustainability. All forms of fraud-sheltering and accounts manipulation by external auditors in collusion with top management of individual companies are unethical and undermine the concept of audit independence; and an invitation to business demise. 230 respondents participated in this study conducted through the exploratory research design, and the result showed a strong relationship between audit process failures and business demise. A recommendation of this report is that the board and management should always ensure to implement credible external auditors’ recommendations as to measures of reducing cases of inefficiency, fraud, and business demise.