THE FUNCTION OF EXTERNAL AUDIT IN CORPORATE RISK MANAGEMENT SYS-TEMS

International independent scientific journal №79/2025 12 THE FUNCTION OF EXTERNAL AUDIT IN CORPORATE RISK MANAGEMENT SYSTEMS Mussina Z. MSc in Accounting and Finance, The American College of the Middle East, Edinburgh, Scotland, UK EH14 4AS; 220 DASMAN, 15453 KUWAIT https://doi.org/10.5281/zenodo.17583043 Abstract The paper examines the theoretical foundations of external audit, analyzing its strategic function in corporate risk management, its contribution to building trust in financial reporting, and its role within corporate control systems. The significance of independent assurance in reducing information asymmetry and improving the quality of managerial decision-making is substantiated. Based on the analysis of practices in major U.S. public companies (Apple Inc., General Electric) and cases of non-index firms (Miller Energy Resources), the study explores preventive and corrective audit mechanisms and the specific features of interaction with relevant committees. Trends in the development of independent external verification are identified, including the integration of big data and AI technologies, as well as strengthened requirements for auditor independence and transparency. Keywords: external audit, corporate control, risk management, financial reporting, financial management. Introduction In the face of enhanced worldwide competition and increased complexity of business operations, the importance of sound corporate control systems, which ensure transparency and credibility of financial information, is growing. External audit is among the key tools utilized to gain confidence in financial reporting and minimize the possibility of manipulating data. Independent verification enables the identification of accounting anomalies, assessing the effectiveness of internal controls, and building a solid ground for managerial decisions based on reliable information. Relevance of this research is verified by the need to involve external audit within corporate risk management practices, which is particularly important for large corporations where the scale of operations and the volume of potential risks are significantly larger. The goal of this article is to analyze the role of external audit as an element of corporate control and a mechanism for risk mitigation using the practices of large enterprises as examples. The study aims to substantiate the significance of independent verification in improving the quality of financial reporting and strengthening trust among investors, creditors, and regulators. Main part. Theoretical foundations of external audit in the corporate control system External audit is an independent examination of an organization’s financial statements, conducted to confirm their accuracy and compliance with established standards [1]. This procedure is intended to reduce information asymmetry between owners, management, and external stakeholders, as well as to strengthen confidence in the disclosed financial information. The main functions of external audit include control, evaluation, informational, advisory, and preventive components (table 1). Table 1. Key functions of external audit in the corporate control system Function Description Significance for corporate control Control Verification of the reliability of financial statements and compliance with legal requirements. Lowers the chances of data corruption and guarantees adherence to regulatory requirements. Function Description Significance for corporate control Evaluation Assessment of the efficacy of internal control frameworks and risk management processes. Highlights vulnerabilities and suggests ways to enhance process dependability. Informational Provision of objective information to stakeholders. Enhances transparency and builds trust among investors, creditors, and regulators. Advisory Recommendations for improving accounting and control procedures. Improves corporate governance and increases the efficiency of business processes. Preventive Identification of potential violations and risks before they materialize. Reduces the likelihood of corporate failures and protects the company’s reputation. In an age of increasingly complex corporate structures and multicultural sources of risk, the task of the external audit is more than a mere assurance of the accuracy of accounting records but, additionally, the examination of the adequacy of internal control systems, risk management processes, and overall transparency of reporting. The global market dynamics of the audit services market confirm this tendency: according to The Business Research Company, the market volume has been steadily growing, proving growth in demand for independent confirmation and verification of the business data credibility (fig. 1). International independent scientific journal №79/2025 13 Figure 1. Global audit services market size, billion dollars [2] The market's growth is about the growing role of audit operations and their relevance to the corporate control system. External audit assures business accountability and observance of principles of integrity, responsibility, and transparency. The result of an objective audit represents a fair judgment of the firm's situation and serves as the starting point for the board of directors and audit committees in assessing management performance. In such circumstances, audit plays an essential part in company control, limiting the possibility of misappropriation, stimulating the quality of managerial decisions, and defending the interests of shareholders and investors. External audit has particular importance in the case of risk management processes, such as ERM (Enterprise Risk Management) and COSO. In such a scenario, audit has not only been viewed as a tool for detecting the breaches, but as a mechanism of examining the maturity of the processes of risk management, the degree of integration of the processes with corporate strategy, and the effectiveness of the response systems. The adoption of innovative predictive analytics and modeling techniques in auditing allows for the early detection of potential threats and the simulation of risk scenarios, thereby improving the efficiency of internal control mechanisms [3]. Timely and professional external audits allow for the detection of systemic risks, increase compliance with regulatory requirements, and ultimately reduce the firm’s overall risk burden while reinforcing its market position. The role of external audit in enhancing trust in financial reporting Independence and objectivity of the auditor are key requirements determining the value and credibility of audit findings. Such principles render the opinion of the auditor impartial, uncompromised by personal interest or influence from the audited organization [4]. In order to have comparable ways of addressing the ethical behavior of auditors, the professional codes come into play, i.e., the IESBA Code, which mandates threats to independence (self-interest, self-review, familiarity, advocacy, intimidation) and safeguards to eliminate them. The main principles that ensure confidence in the audit opinion are summarized in table 2. Table 2. Principles of independence and objectivity of external auditors Principle Description Significance for trust in reporting Independence Lack of financial or other interests that might affect the auditor's judgment. Ensures impartiality and strengthens stakeholders’ confidence. Objectivity Forming the opinion solely on the basis of evidence and facts. Eliminates subjectivity and ensures the reliability of conclusions. Professional skepticism Thorough evaluation of gathered data and preparedness to identify inaccuracies and discrepancies. Reduces the risk of management misconduct and incomplete disclosure. Confidentiality Protection of trade secrets and data obtained during the audit. Builds trust between the auditor and the audited entity. Competence Possession of up-to-date knowledge of standards and audit techniques, continuous professional development. Improves audit quality and the reliability of the audit opinion. From a practical perspective, compliance with these principles is confirmed by the results of regulatory inspections. A review of PCAOB statistics shows that violations of auditor independence remain among the most common causes of inspection findings. Their percentage in 2023 comprised roughly 14 % of all the deficiencies identified, which was higher than during 2021-2022 and reflected the greater supervisory concern for preserving independence and transparency when interacting with audit committees [5]. In order to have a clearer understanding of the root causes behind diminished audit opinion trust, it is advisable to examine the occurrence of such violations in major categories (fig. 2). International independent scientific journal №79/2025 14 Figure 2. Share of auditor independence-related violations by key categories (PCAOB data) Most instances most commonly involve missing documentation of audit committee pre-approvals, insufficient transparency in annual independence confirmations, and mishaps in testing team members' personal economic interests. These findings emphasize that auditor independence and effective communication with corporate oversight committees are key to user confidence in financial reporting. Beyond independence, the completeness and transparency of disclosures significantly influence trust. International Standards on Auditing (ISA 700, 705, 706) require inclusion of a Key Audit Matters section, helping users understand the areas of greatest risk and how they were addressed, thereby reducing information asymmetry and enabling a more objective view of the company’s financial position. Many jurisdictions introduce additional measures to enhance trust, such as mandatory firm rotation every ten years in the EU and partner rotation every five years in the US. Companies disclose auditor independence information in annual reports, while audit committees publish activity reports, increasing transparency and accountability. By reinforcing independence, transparency, and objectivity – supported by international and national standards – external audit becomes not just a compliance procedure but a cornerstone of corporate control, safeguarding business resilience and shareholder interests. Institutional practices of integrating external audit into corporate control The basis of the study includes U.S. public companies from the S&P 500 and S&P 1500 indices, ensuring representativeness and access to standardized disclosures such as proxy statements (DEF 14A), audit committee reports, Critical Audit Matters (CAM) in audit opinions, and data on audit and non-audit fees. In addition, illustrative cases of non-index companies, such as Miller Energy Resources, highlight the consequences of audit deficiencies and regulatory priorities for auditor independence and quality. Apple Inc. exemplifies a highly institutionalized and formalized approach to auditor–audit committee interaction, aligned with leading governance standards. All audit and permitted non-audit services require prior approval by the audit committee, minimizing independence threats such as self-interest and familiarity [6]. The process involves classifying services, assessing potential impacts on independence, and formal written approval. A distinctive feature of Apple’s practice is quarterly reporting to the audit committee on actual audit and related costs, ensuring budget control and fee transparency. Annual DEF 14A filings provide detailed breakdowns by category (audit, audit-related, tax, and other fees), strengthening investor and regulator confidence. In FY 2023, fees paid to Ernst & Young totaled $28,2 million, up from $26,1 million in 2022, reflecting both business growth and heightened audit scope. Partner rotation followed the five-year cycle, and the audit committee held five meetings with auditor participation [7]. These practices illustrate a preventive approach in which external audit functions not only as a confirmation tool but also as a mechanism for managing potential transparency risks. By contrast, the General Electric (GE) case demonstrates the role of external audit in post-factum identification of misstatements and in restoring market trust following regulatory enforcement actions. In 2020, the U.S. SEC fined GE $200 million for having deceived investors regarding sources of profits and the profitability of its insurance business. The investigation revealed that a high percentage of the Power segment's 2016-2017 earnings came from revised cost estimates on long-term contracts that were not revealed at all. In 2017, the company also rebased insurance reserves by $15 billion, with this casting severe doubts regarding the quality and quality of its previous reporting [8]. In response, GE strengthened disclosure controls, implemented periodic reporting to the SEC for internal control problems, and refreshed procedures for disclosing key assumptions – with external auditors taking an active role in re-establishing market confidence. The case emphasizes the importance of professional skepticism and auditor independence going beyond mechanistic confirmation to making recommendation for changes and collaborating with the audit committee and regulators in order to prevent reputational and financial loss. As of 2025, GE continues to reinforce corporate oversight through its formal Audit Committee Charter, International independent scientific journal №79/2025 15 which sets responsibilities for selecting, evaluating, and monitoring the external auditor [9]. The committee reviews alternative accounting methods, oversees internal audit and risk management, and ensures auditor independence. Deloitte has served as GE’s external auditor since 2021, with lead audit partners required to rotate at least every five years to maintain independence and a fresh perspective. Another notable example of the importance of external audit in the energy sector is the case of Miller Energy Resources. In 2017, the SEC sanctioned KPMG for audit failures that led to the issuance of an unwarranted clean opinion. The investigation found that the company acquired Alaskan oil and gas assets for $2,25 million but reported them at an inflated value of about $480 million, recognizing a one-time gain of $277 million [10]. It also double-counted fixed assets of around $110 million, significantly misstating its financial position. KPMG had to disgorge $4,68 million in fees, pay $0.56 million in interest, and a $1 million penalty, and the lead audit partner was personally fined $25,000. The case highlighted inadequate risk assessment and audit supervision and resulted in strengthened independence and competency requirements for auditors of risky industries such as oil and gas. Miller Energy has since dissolved, and the case is now considered a precedent for stricter oversight and improved documentation requirements for audits within the energy industry. The reviewed cases demonstrate that external audit plays the strategic role of corporate control, aligning the interests of management, shareholders, and regulators and facilitating risk governance. Apple Inc.’s approach shows that preventive mechanisms – regular engagement with the audit committee, transparent disclosure of audit fees, and partner rotation – enhance process resilience and investor confidence. The General Electric case highlights audit’s importance in postfactum risk mitigation and restoring trust after significant disclosure failures, whereas the Miller Energy example illustrates how insufficient professional skepticism and oversight can lead to major misstatements and reputational damage. Trends and directions in the development of external audit as a mechanism of corporate accountability Modern external audit is increasingly viewed as part of the corporate control architecture, designed to strengthen trust in financial reporting and support responsible governance. It now extends beyond retrospective verification to include analysis of reporting processes, testing of internal controls, and assessment of the enterprise’s risk profile, with a focus on identifying potential distortions early and recommending process improvements. Regulatory data confirm that audit quality remains a concern. In the U.S., although the share of inspections with significant deficiencies declined in 2024 compared to 2023, the level of insufficient audit evidence is still notable. The gap between the Big Four and midtier firms remains significant, with large networks showing steady quality improvement while smaller firms lag behind (fig. 3). Figure 3. Share of audit inspections with deficiencies, PCAOB data [11] Trends in the development of external audit point to a strengthening of audit committees’ roles in pre-approving services, more frequent engagement partner rotation to preserve independence, broader disclosure of CAM, and integration of digital technologies. The utilization of artificial intelligence and big data analytics provides for automated sampling, enhances the representativeness of audit evidence, and reduces the possibility of subjective errors. All these controls build a strong trust infrastructure in capital markets and helps reduce corporate risk, hence supporting long-term business stability and investment attractiveness. Apart from making financial reporting more credible, external audit performs a systemic role in economic stability, particularly when regulatory turmoil prevails [12]. Novel American trade tariffs and global supply chain redistributions raise the need for transparent and comparable corporate disclosure as investors and regulators increasingly rely on audited data in measuring the ultimate economic consequences and realigning risk management methods. Conclusion External auditing is a vital part of corporate control, enabling the credibility of financial information, reducing information asymmetry, and allowing effec- International independent scientific journal №79/2025 16 tive risk management. Its presence in corporate governance helps to detect and eliminate weaknesses in internal processes, allows transparent reporting, and strengthens the confidence of investors, creditors, and regulators. Evidence confirms that mature practices – such as regular communication between independent auditors and audit committees, as well as the pre-approval of services – enhance business resilience and reduce the risk of material misstatements. Current trends indicate that the function of external audit is evolving from a form compliance exercise to a strategic instrument of corporate risk management. Greater focus on the auditor's perspective of critical audit matters, stricter independence requirements, and the application of big data analytics and automation tools are improving audit quality and making corporate crises less likely. 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