chapter 15 international auditing issues. international accounting & multinational enterprises -...

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


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


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


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


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


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


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


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


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


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


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



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



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


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


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


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


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 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 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)


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


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


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 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


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)

chapter 15 international auditing issues. international accounting & multinational enterprises -...

Documents