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The quality of the audit was again news. And the same goes for the difficult task of assessing this quality. But what makes it so complicated for the average investor? For starters, the maximum audit reports are popular statements. While the newly added segment on critical audit disorders is a big step in the right direction, this is a slow and best friend-friendly improvement. To make a real leap, I have a radical suggestion for policymakers: what if we allowed the largest shareholder of a public company, regularly BlackRock or 3 major institutional asset managers, or, for example, an activist, to appoint the auditor?
This may sound bold, but the difficult incentive, but it’s not an easy condition in corporate governance, is that the administration, explicitly or implicitly, selects the auditor. The Sarbanes Oxley Act, affectionately known as “SOX”, solved this challenge by making it mandatory for the audit committee, a subset of the board, to assume this responsibility. Twenty years after the enactment of SOX, it is not yet transparent that the quality of economic information has actually advanced. For example, you never quite know how Apple Mabig forums are actually independent of management. My suggestion is undeniable and challenging, as it aligns the incentive of the largest business owner with that of the auditor. To be transparent, my concept is another of the formula of providing where the audit committee asks shareholders to ratify the auditor selected in the representative circular. I ask the largest shareholder to make most of the paintings and I ask the other shareholders to ratify it.
This may appear out of the ordinary, but there is a precedent. Before audits were commissioned in 1900 in the UK, major shareholders, with an obvious appearance in the game, used to conduct the company’s audits or have them commissioned. The 3 main asset managers are the most giant shareholders of virtual best friend, 90% of the companies in the S-P 500, adding Apple, Microsoft, Exxon Mobil, General Electric and Coca-Cola. They are unequivocally encouraging and concerned about the company’s long-term prospects. Unlike the transitive budget that enters and leaves corporations, the 3 giants occupy permanent ownership and liquidity positions. BlackRock, in particular, has vigorously encouraged the CEOs of giant corporations to specialize in climate replenishments and environmental sustainability. Would BlackRock and major establishments want to exploit their combined voting force to solve the vexing challenge of aligning auditor’s incentives with shareholders?
As with Apple’s ambitious proposal, there may be accidental consequences. Finding a suitable auditor for any of the 3 large apples in your wallets is also expensive and inconsistent with the goal of minimizing the budget price ratios they manage. In addition, the Big Three votes with control in approximately 80% of all votes at annual general meetings, while voting mainly against proposals sponsored by other shareholders. Will the Big Three be overly respectful of apple control? Evidence suggests that these companies tend to deviate from control recommendations when they elect board administrators. The Big Three could use their influence to keep companies controlled based on the maximum productive interests of their customers.
The very fact that the largest shareholder appreciates the auditor can be a major step forward. If such an offer were to be adopted, an activist shareholder who accumulates enough votes may nominate his best friend and therefore appoint a listener. The proposal will also exempt auditors from being appointed through control and control cannot simply dismiss an auditor who is not with them.
My proposal is never a panacea for the misusment of economic information and the discredited upheavals we face today. However, if adopted, it will create an easier climate in which auditors can also fulfill their critical role in economic markets.
I’m Professor Kester and Byrnes at Columbia Business School. I bring studies and educational concepts on disorders of interest to CFOs and securities.
I’m Professor Kester and Byrnes at Columbia Business School. I am looking to bring studies and educational concepts on disorders of interest to CFOs and securities regulators. I grew up in Mumbai, India, but spent most of my adult life at various educational institutions, adding the University of Washington, Emory University and Duke University. Beyond my great hobbies for crossing educational theory with practice and politics, I love to travel, a dark game called cricket, locate new restaurants and cook with my family. I’m curious to know how other societies place responses to the average disorders that affect us all.