Agency Assurance - Universität St.Gallen

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CHAPTER 2.
The Agency Assurance Model
2.1 The Role of the Audit Committee of the Board of Directors in Reform
With the stakes so high and the potential for future damage so vast, it could be quite
risky to rely on new regulations alone to provide the prescription for change.
Regulators historically have been chasing the business community, and they are likely
to continue to do so, as business adapts at an increasing rate of change ahead of them.
In the mean time, due to the relatively high incidence of scandal already experienced,
even if only experienced by a minority of corporations, all public firms must now
reckon with a higher level of government-imposed constraints.
Almost predictably, some executives are already complaining about the additional
compliance burden that the added bureaucracy has imposed, even describing the
Sarbanes-Oxley Act as a “ball and chain” of requirements. They claim that the
associated added cost to doing business has an unacceptable economic impact, that it is
a disincentive to investment for small and medium size businesses. 1 Although this
argument ignores the huge economic cost of the scandals of the past few years, the
management lobby still uses such reasoning to elicit a sympathetic ear from elected
government representatives.
Due to management’s predisposition to mistrust regulatory constraints, influenced by
their own conflicts of interest, for the vast majority of the reforms being implemented
or considered, it is the board of directors that must step up and accept the leadership
role. More specifically, it is the audit committee that will be left to address the impact
of the reforms on management practices as well as board of directors’ review of those
practices. Committee members must, in addition, be willing to recommend and
implement even tougher reforms that management has not embraced, in order to fulfill
the board’s governance responsibilities, and rebuild public trust in the corporate form.
Shareholders are the legally recognized owners of the concern, providing investment
capital at the most critical, and often most risky, periods of the business’ development.
Investors in corporations enjoy the legally accepted advantage of limited liability.