AUDITOR: AN AGENT BETWEEN TWO PRINCIPALS

The paper examined auditor as agent between the shareholders (owners) who are the real principals recognized by the law and the management/board of directors who are the derived principal. The objective of this paper is to show that auditor though independent as far as the operation of the law is concerned is acting between two principals, the shareholders and the management/board of directors. In theory appointment of auditors is done by the shareholders during the annual general meeting. In practice, the directors are the one that is actually carrying out this crucial responsibility. The need for auditing arises as a result of the conflict of interest between the owners and the management, economic, social or other consequences of users’ erroneous decision. Accounting and preparation of financial statements are becoming more and more complex and users not having direct access to the accounting records from which the financial statements are prepared. Four theories were examined in the study but emphasis was laid on the agency theory. In the real sense of it, auditors are responsible both to the shareholders and the management/ board.