Chapter 15
International Auditing Issues
The Accounting and Auditing
Profession
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Auditing has 3 important requirements
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An objective (independent), competent person
Quantifiable (and verifiable) information
Established criteria (or auditing standards)
Quality of auditing profession depends on
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Reputation of the profession
Quality of the educational system
Certification process
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Global Audit Services
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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)
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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
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Predominance of cash
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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
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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
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Foreign Currency
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Language and Culture
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Auditor must determine if the choice of translation method
is correct
Translators may not give the full story
Knowledge of language is essential
Interaction of Home Country and Local Law
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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
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Distance
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Operations are not audited as frequently or as
thoroughly
Communication is slow
Organization
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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
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Supply of Auditors
Differences in Training – 3 models
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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
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General Agreement on Trade in Services
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Addresses problems of qualifying to practice in
other countries in two ways
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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
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Principles for Reciprocity
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Signed between the AICPA, NASBA, and CICA
Extended to Australia (ICAA)
A short-form exam is administered
Eighth Directive (EU) – auditors must
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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
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Sarbanes-Oxley and PCAOB made
reciprocity more difficult
European Commission established a
provision similar to Sarbanes-Oxley in 2004
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Requirements include
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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
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Statistics found in Economist, 2004
Big Four
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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
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Enron and Sarbanes-Oxley brought changes
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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
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Some firms have had to drop clients
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black
Structure of the Audit Industry
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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
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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
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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
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Vary considerably from country to country
Standards come from
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The public sector (government) – U.S. now
The private sector – U.K., Canada
A combination of the two – Germany
Requirements for a compliance audit
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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
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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?
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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
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IFAC is attempting to harmonize audit standards
and audit professions globally
IFAC sets standards in the following areas
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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
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International Auditing and Assurance
Standards Board (IAASB)
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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
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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
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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
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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
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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
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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)
International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black