Debated if Controls and External

¶ … debated if controls and external auditing can be replaced with each other or if they need to co-exist. Evidence shows that unlike what some people might assume, controls and external audit services need to exist simultaneously but only where various arrangements in corporate governance are available. Results illustrate that a positive relationship exists between risks and different elements of controls. This helps us reach the conclusion that instead of substitution, controls and external auditing services must co-exist as if they are complementing each other. This is because while controls may exist, some people might want additional controls and in this case external auditing services come in handy. Thus stakeholders may feel the need to invest in more than one set of controls. This conclusion is the same as the one reached by Knechel et al. (2007) in his work where the researchers showed that when government is not heavily influencing controls and when ownership rests with limited sphere of owners, there is generally greater investment in controls and people usually invest in more than one form of controls including external auditing.

This relationship was seen in New Zealand in 1995 however it may not be always be correct to increase controls and investment in controls if we want it to be Pareto efficiency. This concept says that allocation from one set of goods to another should only be made when this transfer would make the other set richer but the first set not any worse off. This however is not possible under the form of governance and control seen in New Zealand. The other example is that of heavy regulation as found in the U.S. And the UK. This sort of regulation results in increased controls and governance because heavy regulation doesn't lead to reduced controls and this would again lead to heavy investment in controls. This heavy investment is undesirable since it becomes Pareto inefficient. The general affect of regulation is to restrict the variation in demand for controls while simultaneously raising investment level in an otherwise unregulated environment like New Zealand.