By: Laura Zarrate Prieto U35270374
The case “Actions Speak Louder than Words: A Case Study of Mexican Corporate Governance” portrays the reaction by TV Azteca with regard of the Sarbanes- Oxley Act of 2002. In this assignment I would like to identify reasons why is it extremely important to evaluate management integrity before accepting an audit client such as TV Azteca and the different specific issues that an accounting firm would most likely consider.
Corporate governance is the framework of rules, relationships, and systems and processes within and by which authority is exercised and controlled within a corporation (ASX Corporate Governance Council, 2014). According to the Institute of Internal Auditors (IIA) corporate governance is built on four cornerstones comprised of the internal audit function, the audit committee of the board of directors, executive management and external auditors (Prawitt, Smith, & Wood, 2009). In order for corporate governance mechanisms to work all of the cornerstones just mentioned need to work together and communicate among themselves.
Assessing management integrity is important because it can affect the reliability of the client accounting records and financial statements. Additionally, auditors have a fiduciary responsibility to shareholders in auditing a company. Several accounting scandals where auditors have been brought into litigation with shareholders Auditors violating have happened because they ignore their duty to the shareholders. In order to avoid business and litigation risk, it is critical that the audit firm establishes and documents client acceptance procedures (Perry, 2014).
A major client acceptance issue an accounting firm would have to consider in deciding whether to accept TV Azteca as an audit client is the board of director’s independence. Board independence is very important because they are supposed to supervise the actions of management and defend all shareholder interest. If the board is not independent, they are less likely to object to management decisions that are in the best interest of all shareholders collectively. TV Aztecas’ deal of Unifon in which minority shareholders did not approve of the arrangement clearly shows the lack of board independence and supervision which allowed Salinas to do whatever he wanted.
Another issue that is important to consider is the reputation that TV Azteca and Salinas have in the industry and in business dealings. The case highlights that Salinas’ integrity was questioned in a deal that TV Azteca had with NBC. I would think it’s important to ask TV Azteca for an explanation…