The Role of Auditing in Corporate Governance in Australia and New Zealand: A Research Synthesis

Abstract

T he literature synthesis in this paper provides an overview of Australian and New Zealand research on the role of audit in corporate governance. Our focus is on interactions between corporate governance and auditing, including external audit, audit committees and internal audit.In recent years, CPA Australia has supported several research synthesis projects to provide information to practitioners and researchers about the accumulated research on topical areas. The projects have been conducted in conjunction with the Auditing and Assurance Special Interest Group of the Accounting and Finance Association of Australia and New Zealand. They included competition in the audit market (Carson et al. 2014); auditor independence (Carey et al. 2014); scepticism and trust (Harding et al. 2016); and auditor reporting (Carson et al. 2016). The project reported in this paper is the fifth synthesis in the series. The findings should be helpful in making recommendations for policy changes and for advice to entities and individuals affected by corporate governance. They also identify directions for future research.There are numerous definitions of corporate governance. However, one that has received widespread acceptance is that by Justice Owens in the Royal Commission on the collapse of HIH Insurance Ltd, which is cited in the Australian Securities Exchange (ASX) Corporate Governance Principles and Recommendations (ASX Corporate Governance Council (CGC) 2014).Corporate governance describes 'the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control, are held to account' (ASX CGC 2014: 3). Corporate governance is therefore a means by which companies and other entities discharge their accountability to their stakeholders.A key aspect of governance effectiveness relates to the interaction between corporate governance and auditing. How does auditing affect corporate governance and corporate governance affect auditing? The interaction is not straightforward. To some extent, good auditing will lead to recommendations that will lead to improved governance; but alternatively, good governance should lead to directors setting higher standards, including demanding higher-quality auditing. Both internal and external audits could be affected in different ways. Another related issue is whether better governance is a substitute or a complement for auditing. More effective governance should have a performance-related outcome such as improved disclosure, higher accounting quality or possibly better financial performance. A number of previous literature reviews have drawn conclusions about the relationships between governance and auditing, including audit committees, external audit and internal audit. Bédard and Gendron (2010: 200) reported that audit committee existence and expertise make a difference but number of meetings and size of committee do not. However, Ghafran and O'Sullivan (2013) reach...

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