Discuss Ronen’s solution to the problem of companies “capturing” auditors as a result of management consulting contracts between auditor and auditee.
What will be an ideal response?
ANSWER:
Ronen suggests the creation of financial statement insurance which would be paid by the auditee to an outside insurance company. This insurance would cover both insurance payments to the shareholders as a result of misrepresentation in financial statements and also auditor fees. In turn, the insurance carrier would select and pay the auditor. The amount of coverage and premium would be published with those firms having higher coverage and relatively lower premiums looking best. If the insurance carrier selects a low ball auditor, it increases the risk of having to pay shareholders for sub-par audits.
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