Francisco de Marcos. Professor. Instituto de Empresa
1 December 2004
Auditors play an essential part in the regulation of and stock markets and share capital companies especially, although not solely, those whose actions are spread among a great number of shareholders.
Relations between auditors and the companies they audit
The concern for guaranteeing the auditor’s independence from the corporation whose financial statements' he will be auditing is constant and unanimous in all countries, but the mechanisms designed to achieve this goal vary substantially.
The auditor’s relation with the company whose financial statements are being audited has always been subject to scrupulous, detailed regulation by company and financial statements' auditing legislation. On the European dimension, the fourth directive (78/660/CEE) and eighth directive (84/253/CEE) on corporate law harmonize most of the corresponding regulations. Legislation pays particular attention to the start of the relation and the appointment of the auditor, his or her payment and the duration of the job, the duties of the auditor while carrying out his or her work and the circumstances under which the relation between auditor and the company ends.
Any of these matters can include details that cast doubt on the independence, impartiality and objectiveness of the auditor, with the consequent detriment to the latter’s function. Besides the above-mentioned Community harmonization - which has made a minimum contribution to a legal regime for financial statements' auditing in Europe - various national laws have taken quite different approaches to the regulation of matters affecting relations between the auditor and the company.
The provision of other professional advisory and consulting services for the audited client by the audit firm, or by companies associated with it, is one matter affecting the auditor’s independence, and one that has earned the attention of legislators and regulating authorities of financial markets. Indeed, although arguments support the multiple benefits and economies (contractual, focus and information) resulting from the joint provision of a variety of professional services by the audit firm or its subsidiaries to the audited client - which could also lead to an improvement in the quality of the audit itself - these relations have always been observed with a certain amount of suspicion.
It is argued that the possible conflicts of interest between auditors and the professionals providing their services to the audited company could make auditors tend to depend on their customers to a greater extent and overlook their legal and ethical obligations.
However, except in extreme cases where the audit firm and its subsidiaries obtain a substantial part of their income from the same customer (the audited company), which should be forbidden by law, an annual report informing investors of the professional relations would seem sufficient. Investors - and, where applicable, the auditing committee - could eventually encourage company directors to change their professional services suppliers; but a further-reaching legal intervention would not be advisable.