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Chapter 15
International Auditing Issues
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
The Accounting and Auditing Profession
Auditing has 3 important requirements An objective (independent), competent person Quantifiable (and verifiable) information Established criteria (or auditing standards)
Quality of auditing profession depends on Reputation of the profession Quality of the educational system Certification process
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Global Audit Services
Audit/Attestation and Assurance Services Tax Advisory and Compliance Services Consulting/Management Advisory Services Standard auditing packages are difficult to
use because of international differences
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Risks in determining the scope of a multinational audit (Hermanson, 1993)
Significant or unusual transactions at a sub Size of sub (revenue, net income, assets) Large changes in a sub’s net income Audit committee expectations Competence of sub’s accounting personnel Research shows that risks for domestic and
international audits are similar
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Audit Challenges:Local Business Practices
Predominance of cash Makes tracing transactions difficult Japan – use of checks may not be traceable due
to a lack of provision of cancelled checks Inability to confirm accounts receivable
Translation into another language Receiving returned confirmations is difficult Auditors may be seen as intrusive
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Audit Challenges: Currency, Language, and Law
Foreign Currency Auditor must determine if the choice of translation method
is correct
Language and Culture Translators may not give the full story Knowledge of language is essential
Interaction of Home Country and Local Law Home countries may have laws that extend to subs of their
domestic companies that operate abroad Example – Sarbanes-Oxley 404 compliance by 2006
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Audit Challenges: Distance and Organization
Distance Operations are not audited as frequently or as
thoroughly Communication is slow
Organization Firms may need to expand abroad Global firm alliances are often used
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Audit Challenges:Diversity, Availability, Training
Supply of Auditors Differences in Training – 3 models
Apprenticeship approach – does not require specific university training in Accounting – U.K.
University-based model – U.S. and Germany Dual track model – Netherlands and France
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Reciprocity
General Agreement on Trade in Services Addresses problems of qualifying to practice in
other countries in two ways Requires countries to administer their licensing rules
in a reasonable, objective, and impartial manner and forbids countries from using licensing rules as disguised barriers to trade
Encourages countries to recognize other countries’ qualifications, either autonomously or through mutual recognition agreements
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Reciprocity
Principles for Reciprocity Signed between the AICPA, NASBA, and CICA Extended to Australia (ICAA) A short-form exam is administered
Eighth Directive (EU) – auditors must Obtain qualifications that are deemed to be equivalent to
the reviewing authorities in the host country Demonstrate that they understand the laws and
requirements for conducting statutory audits in the host country
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Reciprocity
Sarbanes-Oxley and PCAOB made reciprocity more difficult
European Commission established a provision similar to Sarbanes-Oxley in 2004 Requirements include
Regular rotations of auditors Independent audit committees at every company Registration and regular inspection by the PCAOB
Proposal on establishing national watchdog organizations is still in the works
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Structure of the Audit Industry
Statistics found in Economist, 2004 Big Four
Audit 97% of all public companies in the U.S. with sales over $250 million
Audit 80% of public companies in Japan Audit two-thirds of public companies in Canada Audit all of U.K.’s 100-biggest public companies Hold over 70% of the European market by
revenue
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Structure of the Audit Industry
Enron and Sarbanes-Oxley brought changes PCAOB was established to regulate the
accounting profession and monitor firms Sarbanes-Oxley prohibits firms from providing
many non-audit services to audit clients (Sarbanes-Oxley Act, 2002)
Risks have increased for large international firms Compliance with Audit Standard 2 on internal
control has been difficult and costly Some firms have had to drop clients
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Structure of the Audit Industry
Trend is to organize around industry This trend results in a matrix form or
organization Industry is the primary focus Functional organization is a secondary focus Firms offer tax and consulting services Some firms have sold some non-audit
practices Some firms are outsourcing services
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Strategies of the Global Audit Firm
Companies who switch to international auditors give these reasons for the switch The need to reflect the increasing size of overseas
business The need to have one firm auditing all companies
within the group Large audit firms have become multinational firms with
strong global focus and control
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Strategies of the Global Audit Firm
Mergers allow firms to gain stronger market share in emerging markets
Citron and Manalis (2001) findings indicate Companies in emerging markets hire large
international audit firms to add credibility to the financial statements
This credibility allows companies to obtain international financing and list on foreign exchange markets
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Audit Standards
Vary considerably from country to country Standards come from
The public sector (government) – U.S. now The private sector – U.K., Canada A combination of the two – Germany
Requirements for a compliance audit U.S. – all publicly-traded companies and those
with more than 500 shareholders and assets of more than $5 million
U.K. – all limited companies must be audited
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Audit Standards
Some audits simply test whether the financial statements reflect the books and records of the firm
Other audits test whether the books and records accurately reflect the original transactions
Why do standards vary? Differing capital markets Differing accounting professions Cultural differences – Japanese confirmations are obtained
from the company as a sign of respect and trust
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
International Harmonization of Audit Standards
IFAC is attempting to harmonize audit standards and audit professions globally
IFAC sets standards in the following areas Auditing, assurance engagements, and related services Quality Control Code of Ethics Education Public Sector Accounting
IFAC is also involved in issues relating to small and medium size companies in developing countries
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
International Harmonization of Audit Standards
International Auditing and Assurance Standards Board (IAASB) Develops ISAs and International Standards on
Review Engagements Develops International Standards on Assurance
Engagements Develops related practice statements
(IAASB Handbook, 2005)
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Benefits of Developing and Enforcing International Standards
Readers of financial statements have justifiable confidence in auditor’s opinion
Readers of financial statements have greater assurance that accounting standards are adhered to
Readers are assisted in making international financial comparisons
Further incentive to improve and extend the set of international accounting standards
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Benefits of Developing and Enforcing International Standards
Increased flow of investment capital Developing countries will find it easier to
produce domestic auditing standards The broader information gap between
investors and management of MNEs is lessened
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Forum of Firms and IFAC Work together to improve international accounting and auditing
standards Forum of Firms requirements
Having policies and practices in compliance with ISAs and the IFAC Code of Ethics
Maintenance of appropriate internal control procedures including intra-firm practice review
Agreement to implement training on international accounting and auditing standards including the Code of Ethics
Agreement to subject assurance work to periodic external quality control assurance
Agreement to support the development of the professional bodies and implementation of international standards of accounting and auditing in developing countries
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
International Forum on Accountancy Development
IFAD was formed after the Asian crisis (1997) IFAD works for conformity and consistency of
national accounting standards with IAS IFAD needs to globally promote education on
IAS, ISA, and IFAC’s Code of Ethics
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Harmonization
European Commission plans to adopt ISAs for all audits effective January 2007 (Sylph, 2005)
Gaining PCAOB collaboration is key to the success of IFAC’s initiatives
PCAOB may slow down harmonization in the U.S. (Giles et al., 2004)