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Section 1. Accounting
https://doi.org/10.29013/EJEMS-20-3-3-11
Barakaev Otabek Otaqulovich, PhD student, Tashkent Institute of Finance E-mail: [email protected]
DIRECTIONS FOR IMPROVING THE EFFICIENCY OF AUDIT IN THE CORPORATE GOVERNANCE SYSTEM
Abstract. This article describes the corporate governance operations, including the definition, functions and importance of audit, internal audit, external audit, audit committees. In particular, the agency's problem arises from the urgency of the issue, the goals and objectives of external audit in solving it, its relationship with corporate governance and its effectiveness, as well as the audit committee, its new requirements and tasks, its organization. The new definition of internal audit, which is the main taste of corporate governance, its main principles and the new tasks that it implements today are presented.
Keywords: Corporate governance, external audit function, external audit efficiency, internal audit, external audit, audit committee, supervisory board, financial reporting, audit opinion, agency theory, transparency, organization of audit committee.
Introduction that act in the interests of shareholders, and corporate
It is clear from foreign experience that a number governance to achieve results. This is because the the-
of financial failures and crises have attracted world ory of agency in today's economy is that management
attention in the last two decades. Examples include (agents) do not always act in the interests of property
Enron, Worldcom, Tyco, Parmalat, and many other owners who are not involved in property management,
major crises [3]. Many projects worth billions have and shareholders demand protection oftheir property
been canceled due to lack of management skills, pre- [4]. In order to solve this problem, the supervisory
vention and control measures. As a result of these board should monitor the executive body and direc-
financial failures and crises, investor confidence in tors and perform an oversight function, including an
financial statements and management reporting has internal control system over financial reporting [5].
declined significantly. In this regard, audit services play an important role in
The key role of corporate governance is to restore reducing the information asymmetry ("information
market confidence. Restoring investor confidence in asymmetry" - the principal and the agent have differ-
financial markets is not easy. To do this, it is important ent types and amounts of information about the com-
to create clear criteria that meet the requirements of pany's activities), as well as easing agency problems be-
effective management and management ofenterprises tween managers and shareholders [3]. Thus, it is clear
that the role and function of effective audit, especially external and internal audit, as well as the audit committee in the control function of corporate governance are the most basic factors in the modern economy.
The globalization of the world economy and the phenomenal emergence of corporate governance are contributing to the further development of its efficiency and the emergence of modern concepts. Today, Corporate Governance has become an important link in ensuring the efficiency of companies.
Literature review
The term "corporate governance" first appeared in the United States in the 1970s. Later, the term became widespread in European countries, where it was continued in research in the field of corporate governance, corporate law and the creation of corporate structures (organizations) [6]. The word "corporate governance" was first used by Richard Eells to mean "the structure and operation of the corporate system". Corporate relations were first studied in 1932 by the American jurists A. Berle and G. Means in the classics as a process of corporate and private property management [8]. Although the term "corporate governance" is not mentioned in their work, they have studied the classic agency problem: how can corporate managers, as agents of shareholders, be directed to the management of corporate assets and the protection of shareholders' interests? They linked corporate governance to the division ofprop-erty and management, expressed in agency relations between property owners (external persons, investors) and their agents (insiders, managers).
From the examples given in the introductory part of the research, the weaknesses of audit committees and internal control systems in large companies such as Enron have led to corporate failure because they provide central monitoring of corporate governance mechanisms.
This means that in corporate governance, reliable and accurate accounting information that has been audited is necessary to reduce the agency's problems.
Over the last thirty years, as a result of the development of corporate accounting, the audit function has changed radically. In particular, there is a need to implement an effective and comprehensive "audit trinity", including internal and external auditors, the audit committee [10]. In 1999, the Blue Ribbon Committee introduced an audit committee, an internal audit, and an external audit that enhanced the reliability of financial statements as a "three-pronged tool" of corporate governance. Internal audit is perceived as a corporate governance mechanism [11]. The main function of internal audit in the corporate governance system is performed by the audit committee. As part of the corporate governance mechanism, the audit committee, together with the management of the organization, internal and external auditors, monitors the promotion and protection of shareholders' capital and interests [12]. The Audit Committee has the right to act on behalf of the Board of Directors in order to protect investors and ensure corporate accountability, while assuming an important oversight role in corporate governance [13]. The Audit Committee receives reports from the management, internal and external auditors on the effectiveness and efficiency of internal management [14].
To alleviate the agency's problems, the basics of corporate governance have been developed to control management behavior and encourage it to be carried out in the interests of shareholders. This can be achieved by preparing high-quality financial statements and reducing revenue manipulation. External audit is one of the monitoring tools used by the supervisory board to encourage managers to take into account the interests of property owners. Therefore, based on the agency theory, an effective board of directors (supervisory board) and audit committee play a key role in monitoring and controlling the actions of agents and, as a result, reduce the agency's costs, taking into account the interests of key agents [4].
External audit is an integral part of corporate governance in the company's internal control system,
which helps to monitor the company's management and thus increase transparency.
In order to meet its obligations to shareholders, the Supervisory Board must be provided with accurate and reliable information. The auditor assists the board in achieving this goal. There should be an open and frank meeting between the auditors and the board.
Auditors' (external) communication with the supervisory board and the audit committee should be open.
Today, stock market regulators and foreign investors are concerned about revenue management, especially in the last two decades.
One of the most important systems of monitoring is corporate governance. Its main goal is not to improve corporate performance, but to solve the agency's problems by aligning management interests with the interests of shareholders [16]. Gul and Tsui advocated the effectiveness of corporate governance as a monitoring system [17].
External audit is perceived as another important monitoring system that helps to reconcile the interests of managers and shareholders and to reduce the capacity of managers' actions. Cohen and others point out that even if the role of the audit committee is perfect, the external auditor is responsible for the financial statements when the symbolic actions of the audit committee can lead to effective management questions [18].
None of the studies on corporate governance and audit conducted in Uzbekistan has focused on the relationship between external audit and corporate governance. Therefore, this study examines the impact of external audits on corporate governance in joint stock companies, including listing companies.
Problem statement
The impact of external audit on corporate governance, in particular, can be fully understood only if the function of external audit is properly understood as a profession. The basic rights and obligations of the external audit activity, responsibilities should
be defined in the regulations on external audit in accordance with the code of ethics and standards of external audit.
The effectiveness of corporate governance cannot be without the effectiveness of external audit. For this, the factors that directly affect the effectiveness of the external audit are the culture and support of the supervisory board. In addition, many studies have examined the impact of audit opinion and audit quality on audit effectiveness for U.S. companies [Shropshire (2010, Johnson, Schnatterly, et al. 2013]).
The purpose of the study was to determine the relationship between external auditors and corporate governance in joint stock companies. The problem is that the corporate governance system does not have enough up-to-date and reliable information on external audits. For this reason, a study was conducted to study the impact of external audit in the corporate governance of joint-stock companies. Research methodology The overall goal of the study is to increase the effectiveness of auditing in Uzbekistan by examining the relationship between external audit and corporate governance.
The specific purpose of the study: This study examines the changes in corporate governance that affect the effectiveness of external audit. These variables include the type of audit report and the timing of its submission, the type of audit organization (large quartet or local), the existence of an audit committee and internal audit service in the supervisory board, and the total assets of the joint stock company. such factors were analyzed. A related variable here is the external audit effectiveness (EAE) in the corporate governance system of Uzbek joint stock companies.
External Audit Effectiveness (EAE) The effectiveness of an external audit is considered in the work of the audit organization and the auditors as a set of indicators such as powers, practices, quality control and assurance. The audit organization and the attitudes of auditors are formed on the basis
of technical standards of audit, legal and regulatory requirements governing auditing.
In particular, the impact on the effectiveness of audit organizations is the distribution of annual income of audit organizations by type of audit opinion, the degree of application of international auditing standards, participation in international networks (membership in the auditor, membership in the auditor, etc.) CIPA, ACCA, CPA) are calculated in points, a total of 100 points.
Independent variables.
Audit report
Previous research by the Securities and Exchange Commission (SEC) has shown that high-quality audits improve the quality of financial statements and reduce the risk of financial errors in an audit report [20]. This is due to the fact that in many studies the hypotheses have been taken into account in the un-qualaifed opinion, but the explanatory (conditional) conclusions have not been taken into account.
Type of audit organization
The volume of the audit organization is highly dependent on the disclosure of the data. One of the most important powers of an audit firm is to encourage clients to disclose more information in their annual reports [21]. The merger offour world-renowned audit firms, currently known as Big-4, consisting of Pricewa-terhouseCoopers (PwC), Deloitte Touche Tohmatsu (DTT), Ernst & Young (EY) and KPMG, will have a significant impact on small-scale audit firms where mergers are a mechanism to prevent corporate governance [22]. However, research by Kim, Simunic, and others has found that audit firms of all sizes do not significantly affect the quality of an audit [23].
Audit report lag (ARL)
It is important information for users of financial statements, including investors and potential investors, when making business decisions. For this reason, timely presentation is one of the most important features of financial reporting [24] and can be used to reduce data asymmetry [24]. Unfortunately, some empirical and hypothetical evidence suggests
that some companies are delaying the publication of their financial statements due to delays in auditing. It is known from some studies that the delay in the audit opinion indicates a low efficiency of the audit organization, ie inversely related to the ARL [24].
Audit Committee
Cadbury's report recommended that all companies set up audit committees. Smith's report emphasizes that the audit committee plays an important role in ensuring the independence and impartiality of the external auditor, as well as in overseeing the company's management.
Most importantly, Smith's report emphasizes the need for the audit committee to be more proactive in raising concerns about directors than putting them under the guitar. In addition, Smith's report emphasizes that all members of the audit committee should be independent and non-executive directors. The annual reports of companies should provide detailed information on the tasks and responsibilities of the audit committee and the actions taken by the audit committee to fulfill these obligations [24].
Internal audit
Corporate governance is not an end in itself, but a means to an end. Different factors affect the achievement of the goal. One of these factors is the effective Internal Audit Function (IAF). The concept of internal audit has played a key role in the debate on corporate governance and financial reporting, and its activities play an important role in the system of effective management and risk management. An internal audit is an independent evaluation function created by management to review these transactions. It impartially reviews, evaluates and reports on the adequacy of internal control as a contribution to the proper use of resources. The guidelines for effective corporate governance include internal control and audit recommendations as an important part of the corporate structure.
The provisions of the Cadbury Code, published in 1992, are designed to improve internal mechanisms based on the assumption of the relationship
between the quality of corporate governance, internal control, audit and financial reporting.
The goal of internal audit is to achieve effective corporate governance through the implementation of the above new and important principles and tasks, and to create additional factors and mechanisms to attract foreign investment into the economy of our country.
Control variables
In addition to the hypothetical variables, we added three control variables. First, a measure of the size of the total assets of a joint venture for a joint stock company. On the one hand, international experience shows that large companies spend more time and money on external auditing than small and medium-sized companies. In fact, large companies need more monitoring. In other small and medium-sized companies, external audit sampling is not economically feasible. Secondly, it has been established that joint stock companies have a listing or zeroing on the Republican Stock Exchange "Tashkent", which confirms the reliability of the enterprises in determining the reliability of the indicators of the international index. Third, the benefits of joint-stock companies' economic efficiency indicators have been studied to influence the effectiveness of the external audit.
Data collection method
According to the information given in the first chapter of the case, there are 587 joint-stock companies operating in the country. Of these, 520 joint-stock companies, 30 commercial banks and 37 insurance companies operate. As of February 28, 2020, 99 out of 587 joint stock companies are listed companies (Source: According to the data of the Republican Stock Exchange "Tashkent" https://uzse.uz/ isu_infos?page=2 as of February 28, 2020).
In order to further enhance the importance of this study, 37 companies were selected to prepare their financial statements on the basis of IFRS and compared with listed companies, based on the requirements of the above decision, and their annual report data were used.
Listing companies registered with the Tashkent Republican Stock Exchange (UZSE) are also included in the analysis in order to further improve and increase the favorable investment climate in the country and provide investors with transparent information about the capital market. As of December 31, 2018, there were 107 listing companies in UZSE, of which 41 companies were selected for this study
Model view.
This study is the first study in Uzbekistan of changes in corporate governance that affect the effectiveness of audit (EAE). Correlation and regression analysis were used, and the effect of descriptive variables on this EAE model is expressed. As in previous studies, corporate governance as well as control factors have been studied for independent variables.
In the regression model, the EAE used a correlation between the dependent variable and the independent variable.
EAE=(0+(1(AUDOPIN)+(2(AUDTYPE)+ (3(ARL)++(4(ACEXIST)+(5(IAEXIST) + + (6(LISTING)+(7(SIZE)+(8(PROFITIBLE)+£
Hypothesis (H) about the effectiveness of the external audit and the relationship between independent variables are interpreted as follows:
H1: There is a "positive" correlation between the EAE and the audit report;
H2: There is a "positive" correlation between of EAE and the types audit organization;
H3: There is an "negative" correlation between the EAE and the submission of the audit opinion at a later date;
H4: There is a "positive" statistically significant correlation between the EAE and the existence of the audit committee;
H5: There is a "positive" statistically significant correlation between the existence of the EAE and the internal audit service;
H6: There is a "positive" correlation between EAE and the listed joint stock company;
H7: There is a "positive" statistically significant correlation between the EAE and volume of assets of the joint-stock company;
H8: There is a "positive" statistically significant correlation between the EAE and the return on assets of a joint stock company.
Analysis and results
In analyzing the impact of external audit on the corporate governance system of joint-stock companies in Uzbekistan, this study provides a basis for further supplementation of primary data. Was also used to measure the degree of correlation between the variables under consideration.
Table 1.- Classification analysis of selected joint-stock companies in Uzbekistan in 2018
Variables № Minimum Maximum Mean Standard deviation
Dependent variable
EAE 78 13 74 46.53 13.98
Independent variables
AUDOPIN 78 0 1 0.91 0.29
AUDTYPE 78 0 1 0.04 0.19
ARL (day) 78 50 331 136.51 41.12
ACEXIST 78 0 1 0.47 0.50
IAEXIST 78 0 1 0.74 0.44
LISTING 78 0 1 0.47 0.50
SIZE (UZS) 000 78 560027 32200661047 1590522268 5352812982
PROFITLOSS (UZS) 000 78 (3020089954) 1140412680 12301455 393590995
PROFIT IBLE 78 (0.30) 0.67 0.09 0.15
Formed by the author by entering primary data in the SPSS program
In this study, the effectiveness of audit firms (EAEs) providing audit services to joint stock companies with a selected corporate governance system was assessed at 100 points, with a minimum of 13 points, a maximum of 74 points, and an average score of 47 points. The system of corporate governance also takes into account the descriptive analysis of changes that affect the effectiveness of external audit.
One of the important analyzes of this scientific work is the regression analysis of these variables. The regression analysis of the report model is significant (p <0.01). R2 = 0.19 and the corrected R2 = 11 percent and F = 2.315. This means that 19% of the variables related to the effectiveness of the external audit are these 8 independent variables. The remaining 81% are explained by factors other than these 8 variables. This is explained by the fact that 100% of the selection was not covered, 78 (13%) out of587 joint stock companies were selected.
The value of p, which differs from zero, yielded 0.035. The value of p is 0.035, and the established distributed significance level is 0.01 (1%) higher than the officially distributed data. Normally, the value of p should be 1%, 5% and 10%, and in the social sphere it should be 5%. In this study, the variability related to the effectiveness of external audit in p <5% and in general is statistically significant to independent variables. However, this requires additional study of other variables in addition to the variables we have selected.
The H1 hypothesis did not confirm a "positive" correlation between the effectiveness of the external audit (EAE) and the types of audit opinion (AUDO-PIN). This means that the "unqualified" audit opinion issued to joint-stock companies does not mean that their external audit is effective.
The hypothesis of H2 a "positive" correlation between the EAE and the AUDTYPE has been con-
firmed, and there is a correlation between them. In other words, the audit of joint-stock companies by a single "big four" audit organization increases the efficiency of external audit by 24.6%.
The hypothesis of a "negative" correlation between the H3 EAE and the audit report submission deadlines (LgARL) indicates a "positive" statistically significant correlation. In other words, the long-term submission of audit opinions in selected joint-stock companies has a significant impact on the efficiency of audit organizations. This is due to the size ofthe joint-stock companies we have chosen and the long-term preparation offinancial statements prepared by them.
While the hypothesis of a "positive" correlation between the H4 EAE and the existence of the audit committee was confirmed, the SPSS program is tabulated separately in this analysis because it generates the same vector as the listing companies.
There is a "positive" correlation between the H5 EAE and the existence of the Internal Audit Service (IAEXIST). The presence of an internal audit service in each joint-stock company increases the efficiency of external audit by 12.4%.
The H6 hypothesis confirms a "positive" correlation between the EAE and the Listing Joint Stock Company (LISTING). The inclusion of these joint-stock companies in the list leads to a higher efficiency of external audit.
There is a "positive" statistically significant correlation between the H7 EAE and the SIZE. This indicates that the effectiveness of external audit is higher in large joint-stock companies than in small ones. Such results can be attributed to the fact that large enterprises are associated with multidisciplinary corporations and use modern technology and present their accounts in a timely and quality manner.
Another explanation is that large companies have strong internal control systems and effective audit committees, and as a result, auditors spend less time conducting compliance and independent testing.
The hypothesis of a "positive" correlation between the H8 EAE and the return on assets of the
joint-stock company (PROFITIBLE) has been confirmed. It influences the effectiveness of external audit in enterprises with high return on assets.
The results of this study will be useful for stakeholders (especially investors and regulators).
In the system of corporate governance, external and internal audit, as well as the analysis and interpretation of the effectiveness of the audit committee through the above econometric model, the realization of the social sphere, the knowledge and understanding of the real situation. Based on studies and analysis, the following can be cited as elements of audit effectiveness in the corporate governance system.
Conclusions and suggestions
In this article, we have looked at the importance of changes in the corporate governance system that affect the effectiveness of the audit. We discussed the role of the audit function in corporate governance and the ways in which these important functions can help solve agency problems. Corporate errors such as Maxwell, Barings, and Enron have necessitated the need to increase the effectiveness of these functions. The study of the current state of audit in the system of corporate governance in our country has allowed us to draw the following conclusions on the second chapter of our research:
1. From the point of view of agency theory, the audit function is an important corporate governance mechanism for shareholders that helps them to monitor and control the management of the company.
The term "true" (as opposed to "accurate") is used by auditors when an audit firm considers the authenticity of its financial statements in accordance with its professional standards. Examples of such assessments include provisions for doubtful debts, collateral costs, debt relief reserves and contingent liabilities.
2. Financial statements audited by an external auditor are those that help reduce the information asymmetry and protect the interests of the various parties by ensuring that the financial statements of management are not subject to material misstatement.
3. This study examines the changes in the corporate governance system that affect the effectiveness of external audit. These variables include the type of audit report and the timing of its submission, the type of audit organization (large quartet or local), the existence of an audit committee and internal audit service in the supervisory board, and the total assets of the joint stock company such factors were analyzed. A related variable here is the external audit effectiveness (EAE) in the corporate governance system of Uzbekistan joint stock companies.
4. A theoretical model of changes in the system of corporate governance that affect the effectiveness of external audit has been developed.
5. The audit committee was examined as an independent variable and the internal audit service as a corporate governing body. An internal audit is an independent evaluation function created by management to review these transactions.
6. In the modern system of corporate governance, the basis for the establishment of the audit committee and its functions were studied in depth, its modern and new functions were proposed.
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