Audit Within the Corporate Governance Paradigm: A Cornerstone Built on Shifting Sand?
| Author | David Gwilliam,Richard Fairchild,Oliver Marnet |
| Published date | 01 January 2019 |
| DOI | http://doi.org/10.1111/1467-8551.12297 |
| Date | 01 January 2019 |
British Journal of Management, Vol. 30, 90–105 (2019)
DOI: 10.1111/1467-8551.12297
Audit Within the Corporate Governance
Paradigm: A Cornerstone Built on Shifting
Sand?
Richard Fairchild, David Gwilliam1and Oliver Marnet2
University of Bath, School of Management, Bath BA2 7AY, UK, 1University of Exeter, School of Business,
Exeter, EX4 4PU, UK, and 2University of Southampton, Southampton Business School, Southampton SO17
1BJ, UK
Corresponding author email: o.marnet@soton.ac.uk
This paper is a case study-based investigation of aspects of the current paradigmaticap-
proach to ‘good’ corporate governance, with its focus on the interlinkedroles of internal
control and risk management procedures, internal audit and external audit, overseenand
coordinated by a formal structure of board committees, in particular the audit commit-
tee. The evidence that we adduce from the study of four high-profile cases of perceived
accounting and governance failure provides limited assurance that this approach will in
fact be cost-eective or ecient in preventingfurther such cases of accounting and gover-
nance failure. Specifically,issues as to remuneration and fee dependence, lack of relevant
knowledge and expertise, social and psychological dependence upon executive manage-
ment appear to have significantly and negatively aected the quality of decision-making
of governance gatekeepers.This suggests that further consideration of relevant economic,
institutional and cognitive/behavioural factors beyond the rational choice model of tradi-
tional economics should underpin future developments in required modes and structures
of governance.
Introduction
This paper sets out to identify and explore flaws
in the corporate governance paradigm through a
review of four cases, chosen as representative of
the identified issues. From the late 1980s onwards
there has developed a paradigmatic approach
to ‘good’ corporate governance for companies
in terms of an overall focus on appropriate in-
ternal control and risk management procedures
within the relevant entity. Responsibilities for
such procedures lie with the board, supported
by a formal structure of board committees and
also by increased emphasis given to the role of
We thank seminar participants at the University of
Galway, Cardi University, the University of Wales
Gregynog colloquium and the London School of
Economics for helpful comments on earlier drafts of this
paper.
internal and external audit. The development of
this paradigm was given significant impetus by
the influential COSO report (COSO, 1992) in the
USA and in the UK by the work of the Cadbury
Committee (Collier, 1997), leading to the develop-
ment of the present Corporate Governance Code
(subsequently the ‘Code’; FRC, 2016). The Code
is not statutory and adherence is not mandatory,
but the London Stock Exchange listing rules
require disclosure of non-adherence.
Against a background of a series of high-profile
cases of perceived inappropriate accounting and
corporate irregularities, the Sarbanes–Oxley Act
(SOX) was passed in the USA in 2002. The Act
was a broad and wide-ranging attempt at further
strengthening the regulatory underpinnings of
the governance paradigm outlined above. With
regard to auditing, the Act included requirements
for: management to report on the eectiveness of
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Audit Within the Corporate Governance Paradigm 91
internal controls and the external auditor to give
an opinion as to the suitability of managerialasser-
tions; the external auditor to report directly to the
audit committee with respect to accounting poli-
cies critical to the overall picture presented by the
financial statements; the prohibition of joint pro-
vision of certain non-audit services; and strength-
ening the position of the audit committee in
terms of investigatory powers, resourcing and the
appointment and removal of the external auditor.
In the UK, post-Enron, the government set
up a number of investigatory committees and
commissioned reports regarding the role and du-
ties of non-executive directors (Higgs, 2003) and
the role and duties of audit committees (Smith,
2003), following earlier eorts aimed at updating
the Code (e.g. Greenbury, 1995; Hampel, 1998;
Turnbull, 1999). While a revised version of the
Code (FRC, 2003) did not dier radically from
the previous version, it required inter alia that,
for largerlisted companies, non-executive directors
should comprise at least half the board, strength-
ened the role forthe audit committee in monitoring
the integrity of the company’s financial reporting
and reinforced requirements for the external au-
ditor to review the management of financial and
other risks.
Although this paradigm commands widespread
support, it has not gone entirely unchallenged.
These challenges have come from those who con-
sider that such a framework is both costly and
likely to stifle enterprise and risk-taking, from
those who question the ability of non-executivedi-
rectors to satisfactorily performthe variety of roles
expected from them and from those who argue
that the ‘approved’ governance mechanisms put in
place have been demonstrably ineective in check-
ing corporate irregularity to date and are unlikely
to be any more eective in the future (B´
edard and
Gendron, 2010; Clarke, Dean and Oliver, 2003;
Larcker, Richardson and Tuna, 2007; McNulty,
Zattoni and Douglas, 2013).
This study focuses primarily on this latter line
of argument and seeks to throw further light on
factors which have acted to limit its eective-
ness and to consider whether they are likely to
continue to do so in the future. By exploring
‘how governance actors and institutions actually
function’ (McNulty, Zattoni and Douglas, 2013,
p. 183), the analysis also contributes to the lit-
erature, which studies and reports activities in
practice with a view to more closely capturing the
dynamic, interactive nature of corporate gov-
ernance (Brennan and Kirwan, 2015; Gendron
and Spira, 2009; Whittington, 2011) and limits to
monitoring (Cullen and Brennan, 2017).
One could contemplate the possibility of the
commercial world rejecting the existing gover-
nance paradigm, to replace it with an alternative.
With an emphasis on organizations’ valuecreation
over time, the International Integrated Reporting
Framework (‘IIRF’; IIRC, 2013) might be a po-
tential candidate to allow reflection on the issues
raised in the present paper – namely remuneration
and fee dependence, lack of expert knowledge and
expertise, excessive dependence on executives
and impacts on the quality of decision-making
from social/psychological factors. While empirical
testing of this conjecture is beyond the scope
of the present paper, we raise the potential of
alternative frameworks to emphasize the depth of
the issues at hand and will reflect on this further
in the conclusion.1
Issues as to methodology and data
This paper does not seek to adopt or articulate
any particular epistemological or theoretical
perspective to explain or underpin its findings.
In terms of methodology it might perhaps be
categorized as interpretative, archival-based case
study research. The advantages and disadvan-
tages of such a research approach have been
rehearsed extensively, and it is not the purpose
of this paper to review them in any detail. The
cases under review highlight critical flaws in
the existing corporate governance paradigm that
we aim to examine. The selected cases are deemed
representative of subsequent scandals, including
those related to the global financial crisis (GFC)
of 2007/08 (House of Lords Economic Aairs
Committee, 2011; US Senate Permanent Subcom-
mittee on Investigations, 2011) and subsequent
scandals (US Senate Permanent Subcommittee on
Investigations, 2013).
Much academic work is based on large-scale
empirical investigations, which have an important
role to play, but we suggest that all too often
such investigations are unable to discuss the
1The authors wish to thank an anonymous reviewer for
the suggestion to consider the potential of alternative
paradigms to address the issues identified in this paper.
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