The need for auditing in directors stewardship role

Auditing involves the examination of a company’s financial statement to ensure that it is reported fairly. The need for auditing arises because of stewardship. Shareholders of companies usually give the stewardship role to the directors. But these agents do not manipulate the figures in those statements, auditors are employed to examine the books. 

1. What's the stewardship role?

The stewardship role is in the hands of the directors of an entity. Whether it is a large corporation or a small firm, the directors are responsible for all the business activities. Therefore, they are expected to report to the owners (shareholders) of the entity on how they have made use of the organization’s resources.

Aside from companies and small businesses, stakeholders of non-profits organizations entrust their resources to the board of trustees. In other cases, shareholders of some organizations are also members of the board of directors or trustees. Under the stewardship role, shareholders are expected to watch over the use and management of the entity’s assets.

2. The need for auditing in stewardship

The stewardship role of directors on behalf of the company's shareholders resulted in the need for auditing. To ensure that directors are not cooking the books of accounts to favor a particular user group, a third party is employed. This individual is not a member of the company and has a high degree of independence from the company. Therefore, he can check the records as fairly as possible.

The review by an external auditor confirms the authenticity of the financial statements that are prepared by the directors of the entity. The auditor provides an opinion with regards to the reports. Such an opinion is said to add credibility to the financial statements. And can be relied on by the shareholders. 

In summary, while the shareholders entrust the stewardship of their resources on the hands of the directors, it is the responsibility of the owners to ensure that they do not place too much trust on the stewards. Therefore, they employ a third eye to observe if their resources are properly managed.

3. Are auditors living up to their role?

Majority of the external auditors worldwide are living up to their role of adding credibility to the report prepared by directors. However, very few mentioned in news websites such as Financial Times are performing below expectations. It is either they failed in professional ethics or they do not comply with certain Generally Acceptable Auditing Standard (GAAS). 

This is true with the Enron's scandals that resulted in the latest economic recession. As a result, some countries set up panels and organizations to monitor how auditors carry out their duties. For example, in the United States of America, there is the Public Accounting Committee (PAC) that ensures that from time to time publicly traded companies' audits are re-examined.