The contemporary auditor -a watchdog: new wine in old wine skins?

• Author: Lesley A. Walcott
• Position: L.L.M. (Lond), Lecturer in Law, University of the West Indies
• Pages: 132-155

THE

CONTEMPORARY

AUDITOR-A

WATCHDOG:

NEW

WINE IN OLD WINE SKINS?

LESLEY

A. WALCOTT*

"An

auditor

is

not

bound

to

be

a

detective,

or

as

was

said,

to approach

his

work

with

suspicion

or

with

a

forgone

conclusion

that

there

is

something

wrong.

He

is

a

watch-

dog,

but not a

bloodhound."-

Re

Kingston

Cotton

Mill

Company

(No

2),

per

Lopes

L J'

INTRODUCTION

There is a marked expectation gap in what the public perceives and expects

from an auditor and what the auditor is responsible for. This is even more so,

given the modern context of the complexities of the capital market, charac-

terised by the dominance of financial and non- financial conglomerates, and

the emergence of sophisticated institutional investors.

It is logical to assume that the global environment should dictate a con-

comitant increase in the standard of professionalism, duty and responsibility

of the auditor. The growing number of actions being brought against auditors

for breach of their duty is testament to the fact that investors are concerned

about the protection they are receiving from auditors.2 The challenge is

whether we can continue to hold to the oft -quoted viewpoint of Lord Justice

Lopes,

that the auditor is a watch dog and not a blood hound.

LL.M;

(Lond),

Lecturer

in

Law,

University of the

West

Indies.

1 [l896] 2

Ch.

279

at

288

.

2

See

infra

n.20

and

accompanying

reset.

3

[1896]

2

Ch

279

at

288.

THE

AUDITOR IN CONTEXT

While there is a growing trend to relax financial rules with regard to small and

medium size companies,4 the increasing growth and changing role of the

corporation in a global economy has been understandably accompanied by a

viewpoint that the societal role of the auditor should be increased. From a

practical perspective, a number of market changes have challenged the dis-

charge of an auditor's responsibility. In the first place, globalization has

brought with it considerable convergence among market actors. A plethora of

amalgamations and mergers have occurred not only among the client compa-

nies but also within the accounting and auditing profession

itself.

Conglom-

erates have emerged which provide a comprehensive range of professional

services,

including audit, corporate finance advice, corporate tax advice and

management consultancy, to a wide range of clients, with often competing

interests. As a corollary to this, in the face of trade liberalization and increased

competition, client-companies will inevitably pursue innovative investment

policies.

Companies wishing to expand into international markets must there-

fore reconcile their financial statements to Generally Accepted Accounting

Standards (GAAP), When registering securities for public offering in a U.S.

exchange or NASDAQ (National Association of Securities Dealers), they must

adhere to International Accounting Standards (IAS), and Securities Exchange

Commission (SEC) requirements. The need for compatibility, under-

standably, places an additional burden on auditors. With reference to expan-

sion, it is safe to state that the competitive environment is likely to trigger an

increase in the pursuit of risky investment policies by the client company. The

associated dangers are obvious, as seen in the contagious collapse of the

domestic Financial market in Jamaica,6 where the rise and subsequent down

4

EEC Council Directive 83/3496, Under the Seventh

Directive,

small and medium

size

groups

may

be exempted

from

preparing group

accounts.

Comment:

The proposed Companies Bill of

Jamaica suggests

the reduction in

financial

disclosure

requirements

with respect to

small

and

medium

size

companies-

See also

Freedman and

Goodwin,

"The Statutory Audit

and the

Micro

Company-

An Empirical

Investigation'

[ 1993] JBL

105.

5

For

instance,

consider the

mergers

which

characterised

the

accounting

industry in 1998,

between Coopers

& Lybrand and

Price

Waterhoust,

now

called

Pricewaterhousecoopers.

Further,

the firm Ernst & Young

recently announced

a

substantial

reorganisation in order to

promote

efficiency.

6

The financial sector in

Jamaica

collapsed in 1997. Several

banks,

including Century National

Bank

and the Eagle

Group,

as well

as insurance

companies

Mutual Life

of

Jamaica.