research@hec - Issue #14 - (Page VI)

The Independence and Competence research Cédric Lesage of Auditors hec A company’s shareholders and managers are connected in a principal/agent relationship. Shareholders make resources available and expect organizational leaders to use them profitably; business managers decide how to use resources and account for them in financial reports. To ensure managers have not falsified accounts (i.e., due to an information shortage), shareholders commission external auditors to verify the accuracy of financial statements. Thus, “audits represent a monitoring cost paid by shareholders to ensure the accuracy of information provided by business executives,” Lesage summarizes. BIOGRAPHY Cédric Lesage is a graduate of the Ecole Supérieure de Commerce in Rouen, and holds a PhD in Management Science from the University of Rennes. He has been professor in the accounting and management control department of HEC Paris since 2006. AUDITOR COMPETENCE AND INDEPENDENCE In this context, the auditor’s mission is to detect any significant errors in financial statements and to then reveal them. A good audit thus fulfills two conditions. First, the auditor is competent enough to recognize errors, i.e., he or she is familiar with applicable regulations; secondly, he or she is independent enough to divulge errors, i.e., there are no conflicts of interest between an auditor’s mission and the company he or she is auditing. ARE ALL AUDITORS COMPETENT? A significant amount of research (mostly Anglo- What affects the quality of an audit? Cédric Lesage and Géraldine Hottegindre of auditor neutrality is not the greatest danger for audit quality. The most harmful factor is a lack of auditor competence. have answered this question and shown that, contrary to popular belief, a lack INCOMPETENCE: THE SOURCE OF 30% OF DISCIPLINARY ACTIONS Lesage and Hottegindre studied a sample of 161 disciplinary actions pronounced by the French Auditors’ commission. They divided actions into two categories: those which could be interpreted as a result of incompetence (attributable, for example, to a failure to participate in training programs) and Saxon) has looked at auditors’ independence, however their competency has rarely been studied. According to Lesage, this is most likely due to the very nature of the audit market in Anglo-Saxon countries, where audits are rarely a legal requirement. As a result, companies that have their accounts audited usually do so deliberately to send a positive message to the market. A company that has its accounts certified to make a show of serious management thus tends to choose a competent auditor. In France, on the other hand, audits are mandatory, even for small businesses. Business leaders tend to view them as a constraint, and auditors’ competence is less of a priority. “There are many small auditing firms (including one-person operations) in France, but their standards are sometimes less stringent than those of large institutions,” Lesage explains. VI research@hec • April-May 2010

Table of Contents for the Digital Edition of research@hec - Issue #14

Cover & Contents
- Strategic Innovation is Accessible to All
- Auctioned IPOs : Breaking Underwriter Dominance
- The Independence and Competence of Auditors
- The Just Hand of theManager

research@hec - Issue #14