Agency Relationship between Auditors and Shareholders

Shareholders appoint auditors as per the provisions of Section 159(1)-(6) of the Companies Act. The auditors are believed to monitor the performance of the management on behalf of the shareholders. They act as watchdogs to ensure that the financial statements prepared by the management reflect the true and fair view of the position and financial performance of the firm.

As auditors act on behalf of shareholders they turn into agents whereas shareholders are the principal. The auditors may prejudice the interest of the shareholders accordingly causing agency problems in the following behavior:

a) Colluding along with the management in performance of their tasks whereby their independence is negotiations.

b) Demanding a very high audit fee that reduces the profits of the firm even if there is unimportant audit work because of the strong internal control system existing in the firm.

c) Questing unqualified reports such might be misleading the shareholders and the public and that may lead to investment losses whether investors rely on such misleading report to create commercial decisions and investment.

d) To apply professional care is failure and because diligence in presentation of their audit work.